Clean Surplus Accounting

Though I don’t do enough looking at the numbers, I do have an interest in valuation methods. A long time back, I mentioned Fred Martin’s use of Benjamin Graham’s formula for growth stocks.

Recently I found a book that discussed something now called clean surplus accounting, though the book (“Buffett and Beyond”) doesn’t actually tell you how to do it. The main number it yields is a modified return on equity (ROE), that ignores one-time events (which is what Saul does to modify the GAAP numbers) to come up with something useful for comparing different stocks. The research indicates strong outperformance over the S&P 500 over all time periods where it’s been tested, when you choose a portfolio of companies with the highest clean surplus ROE.

When I looked it up at Seeking Alpha, there were articles mentioning “Ohlson Clean Surplus.”

Has anyone else run across this? It looks promising, though the “Buffett and Beyond” book is too limited to help understand the details. When I look at the kinds of companies recommended - ALGN, GOOG, BKNG, HD, ORLY, etc. - I see that it could be used as a filter to evaluate stocks recommended by the Fool services. It might reduce volatility and improve performance.