Accrual Ratio Calculator — Earnings Quality
Measure the earnings quality of a company using the accrual ratio. Enter net operating assets at the start and end of the period, net income, and operating cash flow. A ratio near zero means profits are backed by cash; a large positive ratio suggests earnings are driven by accruals that may not convert to cash.
(Net Income − CFO) ÷ Average NOA — closer to 0 means higher earnings quality
- 1
Average NOA
(800,000 + 950,000) ÷ 2 = 875,000 - 2
Accruals (NI − CFO)
120,000 − 80,000 = 40,000The portion of net income not backed by operating cash flow. - 3
CF accrual ratio
40,000 ÷ 875,000 = 0.0457
How does this calculator work?
Accrual Ratio = (Net Income − Operating Cash Flow) ÷ Average Net Operating Assets. A ratio near 0 means earnings closely match cash generation (high quality). Ratios above ~10% suggest accrual-driven earnings that may reverse. The balance-sheet version uses ΔNOA ÷ Avg NOA and should give a similar result.
Formula
How this is calculated
The accrual ratio, developed by Richard Sloan (1996), compares the accrual component of earnings to the asset base. There are two equivalent versions. The cash-flow-based ratio is: (Net Income − Operating Cash Flow) / Average Net Operating Assets. The balance-sheet-based ratio is: (Ending NOA − Beginning NOA) / Average NOA. Both measure how much of reported profit comes from accruals rather than cash. In a healthy business these two versions should be close; a large divergence is itself a red flag.
Net Operating Assets (NOA) equals operating assets minus operating liabilities on the balance sheet (i.e., total assets minus financial assets minus total liabilities plus financial liabilities). A positive and growing accrual ratio means the company is reporting earnings well above its cash generation, often because of aggressive revenue recognition, stretched receivables, or rising inventories. Sloan's original research showed that stocks with high accrual ratios tended to underperform significantly over the following year as the market corrected inflated earnings.
Interpretation benchmarks are approximate: ratios in the −5% to +5% range generally indicate high earnings quality; 5–10% is moderate; above 10% (or below −10%) warrants scrutiny. Negative ratios can indicate conservative accounting, but very large negatives may suggest aggressive write-downs. Always pair accrual analysis with a qualitative review of the notes to the financial statements — one ratio is a starting point, not a verdict.
Frequently asked questions
A high positive accrual ratio means a large share of reported profit is in accrual form — receivables, prepayments or capitalised costs — rather than collected cash. This can indicate aggressive accounting practices and is associated with lower future stock returns.
NOA = Total Assets − Financial Assets (cash, investments) − Total Liabilities + Financial Liabilities (debt, leases). It isolates the operating balance-sheet items — the productive assets funded by shareholders and operating creditors, excluding the financing structure.
Yes — the Sloan ratio is the most common name for the CF-based accrual ratio: (Net Income − CFO) / Average NOA, from Richard Sloan's 1996 paper "Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings?".
TG we-Calculate Editorial Team. (2026). Accrual Ratio Calculator — Earnings Quality [Online calculator]. TG we-Calculate. https://we-calculate.com/calculator/accrual-ratio-calculator
TG we-Calculate Editorial Team. "Accrual Ratio Calculator — Earnings Quality." TG we-Calculate. 2026. https://we-calculate.com/calculator/accrual-ratio-calculator.
TG we-Calculate Editorial Team, "Accrual Ratio Calculator — Earnings Quality," TG we-Calculate, 2026. [Online]. Available: https://we-calculate.com/calculator/accrual-ratio-calculator
@misc{wecalculate_accrual_ratio_calculator, title = {Accrual Ratio Calculator — Earnings Quality}, author = {{TG we-Calculate Editorial Team}}, howpublished = {\url{https://we-calculate.com/calculator/accrual-ratio-calculator}}, year = {2026}, note = {TG we-Calculate} }
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