Definition
Accruals ratio measures the difference between reported earnings and cash flow relative to assets. High accruals often precede earnings disappointments and stock underperformance. It's a key red flag in fundamental analysis and a factor in quantitative strategies.
Formula
Accruals Ratio = (Net Income - Operating Cash Flow) / Average Total Assets
Example
Net income of $20M minus OCF of $15M = $5M accruals. With $200M assets, accruals ratio is 2.5%. Over 5% often signals potential earnings problems.
FAQ
What is Accruals Ratio?
The portion of earnings not backed by operating cash flow.
How do you calculate Accruals Ratio?
A common formula for Accruals Ratio is: Accruals Ratio = (Net Income - Operating Cash Flow) / Average Total Assets
Why is Accruals Ratio important?
Accruals Ratio helps investors evaluate profitability and make more informed decisions.