Measure the quality of a company's earnings by comparing net income to cash flow from operations.
Financial Performance
Earnings Quality
Accrual Ratio5.00%Average
Total Accruals$10,000
Income vs. Realized Cash
About this calculator
Overview
Measure the quality of a company's earnings by comparing net income to cash flow from operations.
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Pro Tips
What does a high Accrual Ratio mean?: A high accrual ratio suggests that a large portion of earnings is not backed by cash flow, which could indicate lower earnings quality or potential aggressive accounting.
What is a 'good' Accrual Ratio?: Generally, a lower or negative accrual ratio is preferred, as it indicates that earnings are well-supported by actual cash inflows.
How are accruals calculated?: In this model, accruals are calculated as Net Income minus Operating Cash Flow. The ratio then scales this over the company's total assets.
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Fun Facts
"Companies with consistently low accrual ratios have historically outperformed those with high accrual ratios in the stock market."
"The 'Accrual Anomaly' is a well-known financial theory suggesting investors often overvalue companies with high accruals."
"Accruals are necessary in accounting to match revenues with expenses, but too many can be a red flag."
