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The accrual ratio is a financial reporting metric that measures the portion of a company’s earnings arising from non-cash accounting adjustments. It is derived by comparing profit figures with operating cash flow or balance sheet movements, relative to average total assets during a reporting period.
The accrual ratio is commonly calculated using two approaches:
| Method | Formula | Description |
|---|---|---|
Balance Sheet (Change in NOA) |
Δ Net Operating Assets ÷ Average Total Assets |
Based on changes in operating assets and liabilities |
Cash Flow Based |
(Net Income − Operating Cash Flow) ÷ Average Total Assets |
Based on difference between accounting profit and operating cash |
This approach uses changes in Net Operating Assets, calculated as operating assets minus operating liabilities.
(NOA at end − NOA at beginning) ÷ Average Total Assets
It reflects how movements in items such as receivables, inventory, and payables contribute to reported earnings during the period.
(Net Income − Operating Cash Flow) ÷ Average Total Assets
It quantifies the numerical difference between accounting income and cash generated from operations over the same period.
The accrual ratio is referenced in financial statement analysis to examine how much reported income corresponds with operating cash activity. By separating cash-backed earnings from accrual-based entries, it provides visibility into how accounting adjustments contribute to profit figures within a reporting period. It is also reviewed alongside balance sheet data to observe working capital movement and changes in operating performance over time.
A lower accrual ratio indicates that a larger share of earnings is reflected in operating cash flow. A higher ratio indicates a greater contribution from accrual-based accounting entries. Accruals may arise from normal timing differences, working capital changes, or accounting estimates.
Consider a company with the following financials for the year:
Net Income: ₹80 Lakh
Cash Flow from Operations: ₹60 Lakh
Total Assets at Beginning: ₹400 Lakh
Total Assets at End: ₹500 Lakh
Average Total Assets = (₹400 Lakh + ₹500 Lakh) ÷ 2 = ₹450 Lakh
Accrual Ratio = (₹80 Lakh − ₹60 Lakh) ÷ ₹450 Lakh = ₹20 Lakh ÷ ₹450 Lakh ≈ 0.044 or 4.4%
This indicates that approximately 4.4% of reported earnings during the period did not appear as operating cash flow.
The accrual ratio is referenced in:
Profit and cash flow comparison
Period-to-period operating analysis
Financial statement reviews
Merger, acquisition, and credit assessments
While insightful, the accrual ratio comes with limitations:
Results depend on published financial statement accuracy
Working capital–intensive businesses may show higher accrual levels
Temporary timing differences can affect outcomes
The ratio reflects a single reporting period unless tracked over time
Read More: Asset Coverage Ratio
The accrual ratio quantifies the share of earnings derived from non-cash accounting components. By comparing reported profit with operating cash flow or balance sheet movements, it provides a numerical view of accrual activity within financial results.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
It indicates that a larger portion of earnings arises from accrual-based accounting entries rather than operating cash flow.
It is commonly calculated using annual financial statements, though interim figures may also be used.
The balance sheet version uses changes in Net Operating Assets, while the cash flow version compares net income with operating cash flow.
It is calculated by subtracting operating cash flow from net income and dividing the result by average total assets for the period.
The accrual ratio represents the proportion of earnings derived from non-cash sources. It helps assess whether profits are backed by actual cash flow or primarily reflect accounting accruals.
The accrual rate (also referred to as the accrual ratio) is calculated using either changes in Net Operating Assets divided by average total assets, or by dividing the difference between net income and operating cash flow by average total assets.
A lower ratio indicates that a larger portion of earnings is reflected in operating cash flow, while a higher ratio indicates greater reliance on accrual-based accounting entries during the period.
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