Accrual Ratio

The Accrual Ratio is a way to identify firms where Non-Cash or Accrual-Derived Earnings make up a significant proportion of Total Earnings. It is calculated as Net Income, minus Free Cash Flow, all divided by Total Assets. This is measured on a TTM basis and earnings are diluted and normalised.

Stockopedia explains Accrual Ratio

The formula is (Net Income - Free Cash Flow), divided by total assets. When free cash flow is greater than net income, cash earnings are higher than accrual earnings, and the accrual ratio is negative (good).

Richard Sloan from the University of Michigan was first to document what is referred to as the "accrual anomaly". His 1996 paper found that shares of companies with small or negative accruals vastly outperform (+10%) those of companies with large ones. He suggest that investors focus too heavily on earnings and not on cash generation. They value the earnings of a high accrual company just as highly as the same earnings of a low accrual company, even though the high accrual company's earnings are more likely to reverse in future years.

When future earnings reverse, investors are 'surprised' and sell off the stock causing the stock price to decline. Similarly, when a low accrual company's earnings accelerate in future years, they are surprised in a good way.

You can read more about accruals here: * Cash is King * Not all Earnings are Created Equal.

This is measured on a TTM basis and earnings are normalised.

Ranks: Low to HighAvailable in screenerAvailable as Table Column

The 5 highest Accrual Ratio Stocks in the Market

TickerNameAccrual RatioStockRank™
PNK:BIMTCambell International Holding16.913
EBR:NYRNyrstar NV12.125
PNK:HGTXUHugoton Royalty Trust9.4050
BOM:526193Royal Cushion Vinyl Products8.5065