Assess earnings quality by comparing reported income to actual cash flow generation.
The accrual ratio (also called the Sloan Ratio) measures the portion of net income not backed by cash flow. A high accrual ratio suggests earnings may be inflated by accounting adjustments rather than actual cash generation.
| Ratio | Quality | Interpretation |
|---|---|---|
| Below −10% | Check | CFO greatly exceeds NI — verify why |
| −10% to 0% | High | Cash flow exceeds reported income — sustainable |
| 0% to 5% | Good | Small gap between income and cash flow |
| 5% to 10% | Moderate | Notable accrual component — investigate |
| Above 10% | Low | Large gap — earnings may not be sustainable |