Accruals Ratio
How much of reported earnings is non-cash?
Definition
The Accruals Ratio measures the gap between reported net income and actual cash flow from operations, scaled by total assets. A high ratio signals that earnings are driven by accounting accruals rather than cash — a potential red flag for earnings quality.
Formula
Interpretation
| Range | Assessment |
|---|---|
| < 0% | High quality — cash flow exceeds reported earnings |
| 0% – 5% | Normal — typical accrual level |
| > 5% | Warning — earnings may not be sustainable |
Research insight: Sloan (1996) showed that high-accrual firms tend to underperform low-accrual firms, as accruals revert to the mean over time.
In Finsco
Computed by the audit earning-quality command.
Related Metrics
- Cash Conversion — OCF / Net Income
- FCF Conversion — FCF / Net Income