What this calculator does
Profit contains judgement; cash does not. The accrual ratio measures how much of reported earnings came from accounting entries rather than from cash actually moving, by tracking how fast net operating assets grew.
A high ratio is a warning rather than a verdict. Net operating assets rising from $900,000 to $1,060,000 gives a ratio of 16.3 per cent, which is worth understanding: it may be legitimate growth, or it may be revenue recognised before the cash arrives.
The formula
Net operating assets are operating assets less operating liabilities, calculated at the start and end of the period. The change is divided by the average of the two balances.
| Term | Meaning |
|---|---|
| Net operating assets | Operating assets less operating liabilities, excluding financing items. |
| Accruals | The gap between reported earnings and cash flow, which shows up as growth in this balance. |
| Earnings quality | How closely reported profit tracks actual cash generation. |
The inputs explained
| Field | What to enter |
|---|---|
| Operating assets, start of period ($) | Operating assets at the start of the period. |
| Operating liabilities, start of period ($) | Operating liabilities at the start of the period. |
| Operating assets, end of period ($) | Operating assets at the end of the period. |
| Operating liabilities, end of period ($) | Operating liabilities at the end of the period. |
When to use it
Screening for aggressive accounting
A persistently high accrual ratio is one of the more reliable warning signs in financial analysis.
Comparing two companies
Similar reported earnings with very different accrual ratios are not equally trustworthy.
Assessing a sudden profit improvement
Profit that rises without cash following is worth investigating.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
What does each level of asset growth imply?
Three levels of closing operating assets.
| Closing operating assets | Accrual ratio | Net operating assets, end |
|---|---|---|
| $1.25m | 1.10% | $910,000.00 |
| $1.40m | 16.3% | $1,060,000.00 |
| $1.70m | 40.7% | $1,360,000.00 |
Questions
Why does growth in operating assets signal accruals?
Because profit recognised without cash arriving has to sit somewhere on the balance sheet, typically as receivables or inventory. A jump in those balances relative to their size is the accounting trace of accrual-heavy earnings.
Is a high ratio always bad?
No. A genuinely fast-growing business legitimately builds receivables and inventory. The ratio flags something to examine, and the explanation may be entirely sound. What matters is whether there is one.
Where do the thresholds come from?
They are conventional rather than fitted. Research on the accrual anomaly generally finds companies in the highest accrual bracket underperform those in the lowest, but the exact cut-offs are rules of thumb.
What should be excluded from operating assets?
Financing items: cash, short-term investments, debt. The measure is about operating performance, so including financing balances would obscure the signal.
For cash generation directly, see the free cash flow calculator. For distress risk more broadly, see the Altman Z-Score calculator.