Earnings quality (Earnings qual.)
One minus the accrual ratio: how much of reported profit was backed by cash rather than by accounting entries.
Sloan showed that companies whose profit is mostly accruals go on to disappoint. This is a direct read on that.
How it is computed here
1 - ((net income - operating cash flow) / total assets)
Measured over the latest complete fiscal year, as filed. Filed under quality. Higher is the stronger reading, other things equal.
No published threshold exists for this figure, so this page prints none. Read it against the company's own history and its peers instead.
When it misleads
- Higher is better here, because the accrual term is subtracted.
- Total assets in the denominator makes it sensitive to a large acquisition.
- A single year is weak evidence; the accrual anomaly is a multi-year effect.
Questions
How is earnings quality calculated?
1 - ((net income - operating cash flow) / total assets). Measured over the latest complete fiscal year, as filed.
What does earnings quality tell a value investor?
Sloan showed that companies whose profit is mostly accruals go on to disappoint. This is a direct read on that.
When does earnings quality mislead?
Higher is better here, because the accrual term is subtracted. Total assets in the denominator makes it sensitive to a large acquisition. A single year is weak evidence; the accrual anomaly is a multi-year effect.