Accruals Ratio (Accruals)
How large the gap between book earnings and actual cash is relative to assets — a quality measure for checking whether earnings are inflated.
Accruals Ratio = (Net Income − Operating Cash Flow) ÷ Total Assets
Generally, 10% of total assets or less is seen as sound, and anything larger as worth watching.
In plain terms
The profit a company records on its books (net income) and the cash that actually lands in its account (operating cash flow) can differ. That gap is called "accruals."
The accruals ratio looks at how big that gap is relative to the company's assets. The larger the gap, the more it means "book earnings were recorded ahead of the cash."
What it tells you
It's a measure of earnings quality. Small accruals (earnings that are already cash) point to healthy earnings; large accruals raise the possibility that earnings are inflated.
The measure comes from accounting research (Sloan, 1996) finding that the further book earnings run ahead of cash, the more disappointing later earnings tend to be.
Formula
Accruals Ratio = (Net Income − Operating Cash Flow) ÷ Total Assets
What high or low means
Generally, 10% of total assets or less is seen as sound, and anything larger as worth watching.
The idea is that if the gap between book earnings and cash exceeds 10% of assets, you take another look at earnings quality.
There are also normal reasons for large accruals. A fast-growing company sees receivables and inventory rise together, so accruals naturally get bigger. That makes it hard to conclude anything from a single year's figure.
Look at the trend rather than one year, and read it alongside other cash measures such as FCF conversion to see true earnings quality.
It is hard to apply to overseas (IFRS) companies with different accounting standards, so it is used mainly for companies under U.S. accounting standards.
In 2001, the large U.S. company Enron looked like a blue-chip firm posting enormous profits on paper. But much of that profit was not actual cash — it was "numbers on the books" inflated through accounting devices.
Once the reality came to light, Enron collapsed into bankruptcy almost overnight, and Arthur Andersen — one of the world's five largest accounting firms, which had audited the books — lost client trust and fell with it. It's an event that shows what a metric like accruals, which asks "is the reported profit backed by cash?", is designed to catch — that numbers can look good while the cash doesn't follow.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see Accruals alongside the sector benchmark.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.