Glossary term
Accruals Ratio
Net income minus operating cash flow, scaled by total assets. Measures how much of reported profit is accounting accrual rather than cash — high accruals have historically preceded weak returns (Sloan, 1996).
Definition & the Sloan Result
The accruals ratio takes net income, subtracts operating cash flow, and divides by total assets. When the result is high, a large share of reported profit exists only as accounting entries — receivables booked but not collected, inventory built but not sold. Richard Sloan's 1996 study showed that firms with high accruals systematically underperformed firms whose earnings were backed by cash, one of the most replicated findings in the earnings-quality literature. Markets read the income statement; the cash flow statement catches up later.
What High Accruals Look Like
The pattern usually shows up as receivables growing faster than sales (aggressive revenue recognition), inventory growing faster than sales (production ahead of demand — a classic semiconductor cycle warning), or persistent gaps between net income and operating cash flow. None of these prove manipulation; every growing business carries some accruals. The signal is persistence and size relative to the asset base.
How Closelook Uses It
The accruals ratio anchors the Earnings-Quality module of the Closelook Company Score, next to OCF/net income, FCF/net income and the inventory- and receivables-versus-sales spreads. It also feeds the Beneish M-Score through its TATA term.