Accruals
What it measures¶
Accruals are the part of profit that is not cash: a sale booked before the customer pays, a cost recorded before it is paid or spread over several years. This check measures them the way Richard Sloan did: net income minus operating cash flow, divided by average total assets (the mean of the assets at the start and the end of the year). It asks: is the result within 10% of assets, either way?
Why it is on the page¶
Sloan found in 1996 that companies whose profit ran far ahead of their cash tended to see that profit fall back in the following years, while the share price did not anticipate it. It is the cheapest and least model-dependent question about the quality of a profit, which is why it opens this area — and why the accrual idea is counted only once, here, even though the other three models of the area also use it.
Thresholds, their source and the population they were fitted on¶
| Result | When |
|---|---|
| ✓ passed | (net income − operating cash flow) ÷ average assets is between −10% and +10% |
| ✕ failed | it is above +10% (profit far ahead of cash) or below −10% (cash far ahead of profit) |
| ○ not evaluable | net income, operating cash flow or one of the two year-end asset totals is not stored |
The band works both ways on purpose: a profit far below the cash it produced can come from large one-off write-downs, which also make the year's profit a poor guide.
- Source: Sloan (1996), "Do stock prices fully reflect information in accruals and cash flows about future earnings?"; the ±10% band is a practitioners' line — Sloan ranked companies into tenths and set no cut-off.
- Fitted on: US companies, 1962–1991. A later study (Green, Hand and Soliman) found the market effect no longer reliable in US shares, though the accounting pattern remains a recognised warning.
- Evidence grade: peer-reviewed and replicated (the measure); practitioner convention (the band).
- Basis: absolute.
A worked example¶
Honeywell International, fiscal year 2025 (statements stored on 25 October 2026): accruals of −2.3% of average assets — cash a little ahead of profit, well inside the band — passed.
Meta Platforms, the same year: −17.2% — cash far ahead of the reported profit, outside the band — failed. That is not an accusation: a large non-cash charge in the income statement produces exactly this pattern.
What “No verdict” means here¶
The check is not evaluable when the year's net income or operating cash flow, or the total assets at either end of the year, is not stored; the missing input is named and the check leaves the area's count. Like every check, it is never counted as 0 or as a failure when it cannot run.
What the verdict is and is not¶
A pass says profit and cash moved together within the band in the latest year. A failure is a reason to read the cash-flow statement, not a finding that anything is wrong. It is not a forecast and not an instruction to trade the shares. The Fundamentals page shows the same ratio as the Sloan accruals ratio.