Accruals ratio

The accruals ratio measures the gap between accounting earnings and cash earnings, scaled by total assets. The construct is mechanical: when reported net income exceeds operating cash flow, the difference is being recognized through accrual accounting rather than collected as cash, and persistent positive accruals are the textbook signature of aggressive revenue recognition or working-capital build-up. Sloan's 1996 paper documented that high-accruals firms systematically underperform low-accruals firms over the following twelve months, and the result has been replicated across decades and markets. We use a 10% accruals-ratio threshold as part of our quality gate: companies with persistent accruals above this level fail the gate and require an explicit reconciliation before further analysis. The construct is also useful for industry-relative comparisons — a 12% accruals ratio is unremarkable in a heavy-capex industrial growing working capital with the business, but is alarming in a mature consumer-staples company where the working-capital cycle should be stable.