What is the Sloan Ratio?

Named after Professor Richard Sloan of UC Berkeley, the ratio compares accruals (net income minus operating cash flow) to average total assets. Sloan's 1996 paper documented that companies with high accruals systematically underperformed those with low accruals over the subsequent year — the 'accruals anomaly,' one of the most-cited findings in academic finance.

Is a negative accrual ratio always good?

Usually yes — it means cash flow exceeds reported income, suggesting conservative accounting. Extreme negative values (below -10%) can indicate working-capital releases (inventory liquidation, AR collection), aggressive depreciation, or one-time cash recoveries that aren't sustainable. Always investigate why.

How is this different from the Beneish M-Score?

The Beneish M-Score is a more complex forensic accounting model using 8 ratios to estimate likelihood of earnings manipulation. The accrual ratio is one simpler component capturing the same intuition. Both are used together in academic and forensic accounting work.

Where do I find net income and CFO?

Net income is the last line of the income statement. Cash flow from operations is the first total in the cash flow statement, after the operating-activities reconciliation. Total assets sit at the bottom of the assets section of the balance sheet.

Does this work for banks?

Less reliably. Banks use loan-loss provisions and securities portfolio accounting that distort the simple Sloan ratio. Use industry-adjusted versions or sector-specific quality metrics for financial firms.

How is this ratio used in stock selection?

Quant strategies long stocks in the lowest accrual decile and short stocks in the highest decile. Academic studies confirm the spread persists, though it has narrowed since the 2000s as the effect became widely known.

Finance

Accrual Ratio Calculator

Assess earnings quality by comparing reported income to actual cash flow generation.

Net Income ($)

Cash Flow from Operations ($)

Beginning Total Assets ($)

Ending Total Assets ($)

Formula:
Accrual Ratio = (Net Income − CFO) / Avg Total Assets
Avg Total Assets = (Beginning + Ending) / 2
Lower ratio = higher earnings quality

Reported earnings and actual cash earnings should track each other over time. When they diverge persistently, something is happening on the books that doesn't match what's happening in the bank account. The accrual ratio quantifies that gap as a percentage of assets and exposes the kind of earnings that don't survive close scrutiny.

What the ratio measures

Accrual Ratio = (Net Income − Cash Flow from Operations) ÷ Average Total Assets

Accruals are the non-cash adjustments accountants make to convert cash flows into accrual-basis earnings — recognizing revenue when earned (not collected), recognizing expenses when incurred (not paid), and using estimates for depreciation, inventory valuation, and bad debt. Each of these requires judgment, and high accruals signal that more of the reported earnings came from judgment than from cash.

The Sloan anomaly

In 1996, Richard Sloan published a paper showing that low-accrual-ratio stocks systematically outperformed high-accrual-ratio stocks in the following year. The hedged spread averaged 10%+ annually for two decades. The mechanism: high accruals indicate earnings that won't persist (judgment-heavy line items revert toward cash reality), so the market gradually re-prices those firms down. The anomaly has narrowed but persists in academic data.

Walkthrough: $500K NI, $450K CFO, $3.1M avg assets

Accruals: $500,000 − $450,000 = $50,000
Average assets: ($3M + $3.2M) ÷ 2 = $3.1M
Ratio: $50,000 ÷ $3,100,000 = 1.61%
Verdict: solidly within the "good" range — earnings are well-supported by cash generation.

Interpretation table

Below −10%: CFO substantially exceeds NI — verify whether one-time cash recovery or aggressive depreciation explains it
−10% to 0%: High quality; cash flow keeping pace or ahead
0% to 5%: Normal quality; minor accrual gap
5% to 10%: Watch; investigate working capital changes, revenue timing
Above 10%: Low quality; meaningful gap that needs explanation

When the ratio misleads

Rapidly growing companies legitimately accumulate accounts receivable and inventory, inflating accruals without manipulation
Acquisition years carry purchase-accounting accruals that don't reflect ongoing operations
Banks, insurance, and other financial firms use sector-specific accruals that the simple Sloan ratio doesn't capture well
One-year readings can be noisy — three-year average ratios reduce noise meaningfully

FAQ

Where is "operating cash flow" on a 10-K?

Top of the cash flow statement, in the operating activities section, the line typically labeled "Net cash provided by operating activities."

Is this the same as discretionary accruals?

No — discretionary accruals (used in Jones Model studies) try to separate normal from manipulated accruals using regression. The Sloan ratio is the simpler total-accrual approach.

Do I need GAAP filings?

Standardized financial statements (GAAP for U.S., IFRS internationally) are needed. Press releases and adjusted EBITDA tables don't include the cash flow statement detail required.

Are accruals always bad?

No — they're a normal part of accrual accounting. The issue is persistent high accruals relative to cash flow.

How does this relate to free cash flow?

Free cash flow is CFO minus capex; the accrual ratio uses CFO directly. FCF-based earnings-quality measures exist (e.g., FCF/NI ratio) and are complementary.

Does the calculator handle negative values?

Yes — companies can have negative accruals (CFO > NI) or negative NI itself. Interpret extreme values in context of business stage and one-time events.

Related calculators

Sources

Reviewed by Marcus Tan, CPA, on February 23, 2026.