← Business Metric: Financial (all topics)
Accrual ratio
What it is
The share of reported earnings that comes from accounting accruals rather than cash flows, measured as profit less operating cash flow, over average total assets. It formalises the profit-versus-cash comparison into a single number
High accruals have been repeatedly associated with weaker subsequent returns
Impact on industries
- Reduces earnings quality to one comparable figure, so it can be screened across a portfolio rather than assessed case by case
- Grounded in evidence - the tendency of high-accrual firms to underperform is one of the more durable findings in accounting research
- Growing firms show high accruals legitimately, since working capital expands with the business, so it flags rather than proves
- It is a screening tool, not a verdict - a high reading is a reason to examine the accounts rather than a conclusion about them