Accrual Ratio Calculator
Calculate the cash-flow-based accrual ratio to assess earnings quality by measuring the gap between net income and actual cash generation.
How to use this tool
- Enter net income, cash flow from operations (cfo), cash flow from investing (cfi) and average total assets in the fields above.
- Results update instantly as you type — or click Calculate.
- Read your accrual ratio and the full breakdown beneath it.
Formula
Cash-flow-based accrual ratio (Sloan, 1996):
Accruals = Net Income − CFO − CFI
Accrual Ratio = Accruals / Average Total Assets
A higher (more positive) ratio indicates earnings are less supported by cash flows, signaling lower earnings quality.
How it works
The cash-flow-based accrual ratio, introduced by Richard Sloan (1996), measures the portion of earnings that are accrual-based rather than backed by actual cash generation. It is computed as net income minus operating and investing cash flows, scaled by average total assets.
A ratio close to zero suggests high earnings quality (profits closely match cash generation). A large positive ratio indicates substantial accruals — earnings may be inflated relative to cash flows, which is a red flag for investors. Negative ratios can indicate conservative accounting or one-time cash items. The ratio is most meaningful when compared across periods or against industry peers.
Worked example
Net income $50k, CFO $30k, CFI −$10k, avg assets $500k
- Accruals = Net Income − CFO − CFI = $50,000 − $30,000 − (−$10,000) = $50,000 − $30,000 + $10,000 = $30,000.
- Accrual Ratio = $30,000 / $500,000 = 0.06.
- As a percentage: 6.00%.
Accrual ratio = 0.06 (6%), indicating moderate reliance on accruals relative to total assets.
Key terms
- Accrual Ratio
- A measure of earnings quality that quantifies the degree to which profits are backed by cash flows rather than accounting accruals.
- Accruals
- The difference between net income and cash flows from operations and investing; represents non-cash components of earnings.
- CFO (Cash Flow from Operations)
- Cash generated by a company's core business operations, as reported in the cash flow statement.
- Earnings Quality
- The degree to which reported earnings reflect the true underlying cash-generating ability of a business.
- Sloan Ratio
- Another name for the accrual ratio, after Richard Sloan whose 1996 paper showed high-accrual firms tend to have lower future stock returns.