How this calculator works
Accruals are the part of reported earnings that is not backed by cash. The balance sheet version measures how much net operating assets grew, while the cash flow version compares net income with the cash the business generated from operations and investing. Both divide by average net operating assets so that larger companies are comparable with smaller ones. A high accrual ratio is a warning sign: earnings that outrun cash tend to reverse, and studies of the accrual anomaly find that high-accrual firms underperform later. The two methods answer related but different questions and should not be mixed.
Formula
Net operating assets (NOA) = operating assets - operating liabilities. Average NOA = (beginning NOA + ending NOA) / 2. Balance sheet accruals ratio = (ending NOA - beginning NOA) / average NOA. Cash flow accruals ratio = (net income - operating cash flow - investing cash flow) / average NOA.
Worked example
Operating assets rise from $800,000 to $900,000 while operating liabilities rise from $300,000 to $320,000, so NOA goes from $500,000 to $580,000 and average NOA is $540,000. The balance sheet ratio is $80,000 / $540,000 = 0.1481. With net income of $120,000, operating cash flow of $150,000 and investing cash flow of -$40,000, the cash flow ratio is ($120,000 - $150,000 + $40,000) / $540,000 = 0.0185.
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Frequently asked questions
Which accrual ratio should I use?
The cash flow version is closer to the classic Sloan accrual measure and is easier to compare across companies. The balance sheet version captures long-lived operating investment and is useful when cash flow statements are unavailable or unusual.
What does a negative ratio mean?
NOA fell, or cash flow exceeded earnings. That usually means accruals reversed: for example, receivables were collected or inventory was sold. Negative accruals are generally regarded as higher quality than large positive ones.
Should cash be treated as an operating asset?
Usually not. Cash and marketable securities are financing assets, so operating assets normally exclude them, and operating liabilities normally exclude debt. Apply the same convention to both years or the change in NOA will be distorted.