Cash Flow Accrual Ratio Calculator

What Is the Cash Flow Accrual Ratio?

The cash flow accrual ratio measures the part of net income that did not arrive as cash during the period, scaled by the company's average net operating assets (NOA). It takes the accruals straight from the cash flow statement:

• NI: net income from the income statement.
• CFO: cash flow from operating activities.
• CFI: cash flow from investing activities, usually negative because capital spending is a cash outflow.
• Average NOA: (beginning NOA + ending NOA) ÷ 2.

A low or negative ratio means profit is backed by cash. A high ratio means more of the profit sits in receivables, inventory or other accruals that may not turn into cash.

How to Calculate the Cash Flow Accrual Ratio

A company starts the year with operating assets of 1,000,000 and operating liabilities of 400,000, and ends it with 1,200,000 and 450,000. It reports net income of 150,000, operating cash flow of 120,000 and investing cash flow of −80,000:

1. Find beginning NOA. 1,000,000 − 400,000 = 600,000.
2. Find ending NOA. 1,200,000 − 450,000 = 750,000.
3. Find average NOA. (600,000 + 750,000) ÷ 2 = 675,000.
4. Add the cash flows. 120,000 + (−80,000) = 40,000.
5. Find accruals. 150,000 − 40,000 = 110,000.
6. Divide. 110,000 ÷ 675,000 ≈ 0.1630, or about 16.30%.

Cash Flow Accrual Ratio Examples

The asset-light firm earned 80,000 but brought in 110,000 from operations and 10,000 from selling equipment, so cash beat profit. The mature firm's operating cash flow of 58,000 nearly matched its 60,000 of net income; most of its 27,000 of accruals come from 25,000 of capital spending. The manufacturer reported 175,000 of profit with only 15,000 of operating cash flow, which calls for a look at receivables and inventory. The expanding firm earned 95,000, collected 30,000 from operations and spent 90,000 on investment, so its ratio is high even though the build-up may be planned growth.

How to Read the Result

Negative

Cash flow beat net income. Profit is more than covered by cash.

Near zero

Net income and cash flow moved together. Few net accruals.

Positive

Net income ran ahead of cash. Check receivables, inventory and capital spending.

Very high

Most of the profit is accruals. Look for aggressive revenue recognition or heavy investment.

There is no universal cut-off. Research going back to Richard Sloan (1996) found that companies with high accruals tended to report weaker earnings later than companies with low accruals. Compare a company with its own past results and with its industry rather than with a fixed number.

Cash Flow vs Balance Sheet Accrual Ratio

Both versions divide by average NOA but measure accruals differently:

• Cash flow method (this page): net income minus operating and investing cash flow. It reads accruals from the cash flow statement, so acquisitions, disposals and currency moves distort it less.
• Balance sheet method: ending NOA minus beginning NOA. It needs only two balance sheets. Use our Balance Sheet Accrual Ratio Calculator for it.

Because investing cash flow is subtracted, heavy capital spending raises the cash flow ratio. Read a high figure together with the capital spending note in the accounts.

Limitations and Common Mistakes

• Wrong sign on investing cash flow. Enter capital spending as a negative number, as it appears on the cash flow statement.
• Leaving out investing cash flow. Enter 0 if there was none, not a blank.
• Including cash or debt in NOA. Cash, short-term investments and borrowings are financing items and stay out of NOA.
• One period only. A single year can be skewed by the timing of collections or large purchases, so look at several years.
• Negative average NOA. When operating liabilities exceed operating assets the ratio loses its meaning, so the calculator asks for a positive average.

How to Use the Cash Flow Accrual Ratio Calculator

1. Enter the balance sheet figures. Type operating assets and operating liabilities at the start and end of the period, such as 1,000,000, 400,000, 1,200,000 and 450,000. Commas are fine.
2. Enter the income and cash flow figures. Type net income, operating cash flow and investing cash flow, such as 150,000, 120,000 and -80,000. Use a minus sign for outflows and 0 if there were none.
3. Read and copy the result. The ratio appears as you type, with the working, beginning, ending and average NOA, the combined cash flow, the accruals and the ratio as a percent. Press Copy to copy it, or Clear or Esc to start again.

Example: average NOA 200,000, net income 95,000, operating cash flow 30,000 and investing cash flow −90,000. The result is 0.775, from 155,000 ÷ 200,000.

Who Can Use This Calculator?

Frequently Asked Questions (FAQs)

Sources

• Wikipedia. Accrual.
• Wikipedia. Earnings quality.
• Wikipedia. Net operating assets.
• Wikipedia. Cash flow statement.
• Wikipedia. Operating cash flow.
• Stockopedia. Accrual Ratio Meaning.