What is Accrual Ratio?
The accrual ratio measures the portion of a company's earnings that comes from accounting adjustments (accruals) rather than actual cash flow. It is used to gauge the quality of earnings.
- Low Ratio: Suggests high quality earnings (backed by cash).
- High Ratio: Suggests low quality earnings (backed by non-cash accounting entries).
Formulas
First, calculate Net Operating Assets (NOA):
NOA = Operating Assets - Operating Liabilities
Then, calculate Average NOA: (Beginning NOA + Ending NOA) / 2
1. Balance Sheet Method
Result = (Ending NOA - Beginning NOA) / Average NOA
2. Cash Flow Method
Result = (Net Income - Operating Cash Flow - Investing Cash Flow) / Average NOA