The Sloan ratio and accrual quality
Earnings are an opinion; cash is a fact. The Sloan ratio measures the gap between them.
What it measures
The ratio takes net income, subtracts cash from operations and cash from investing, and divides by total assets. What is left is the share of reported earnings that came from accruals rather than cash movements.
Accruals are not improper. Revenue recognized before payment arrives, depreciation, and provisions are all ordinary accounting. The question is proportion.
Richard Sloan’s 1996 finding was that companies with high accruals tended to underperform afterwards, because accrual-heavy earnings are less likely to repeat.
FilingEye computes it from the cash flow statement and balance sheet as filed, and flags it on distance from zero rather than on sign alone.
How to read it
Both directions matter. A strongly negative ratio is as much a signal as a strongly positive one — it usually means earnings are being understated, which has its own reasons.
| Range | What it suggests |
|---|---|
| Between −10% and +10% | Earnings broadly backed by cash |
| ±10% to ±25% | Accrual-heavy — worth understanding why |
| Beyond ±25% | Earnings and cash have diverged materially |
What it does not tell you
The part most tools leave out. A score you over-trust is worse than no score.
- It says nothing about intent. A high ratio can come from a genuine change in the business — a shift to subscription billing moves cash and revenue apart by design.
- Capital-intensive companies and fast-growing ones carry structurally higher accruals. Compare a company against its own history and its own sector, not against a universal number.
- A single year is weak evidence. The signal is in the trend, which is why the ratio is always shown beside the prior period.
- It uses total assets as the denominator, so a large acquisition mid-year distorts it in ways that have nothing to do with earnings quality.