Last updated: May 2026
Accrual Ratio CF — definition:
The Cash Flow Accrual Ratio measures the difference between a company's reported net profit and its actual cash generation, scaled by average net operating assets. Formula: (Net Profit − Cash Flow from Operating Activities − Adjusted Cash Flow from Investing Activities) / Average Net Operating Assets. A negative value indicates earnings are backed by real cash — the hallmark of high earnings quality. The best companies have the largest negative Accrual Ratio CF.
Key facts about the Accrual Ratio CF:
- A negative Accrual Ratio CF = earnings are backed by real cash = high earnings quality
- A positive value = profit exceeds cash generation = potential red flag
- Used to implement Patrick O'Shaughnessy's Millennial Money investment strategy
- To find the top 20% of companies by earnings quality: set the screener slider from 100% to 80% (note: reverse of most ratios)
- Available in the Quant Investing screener for 22,000+ companies across global markets
Accrual Ratio CF (Cash Flow)= (Net profit – Cash flow from Operating Activities - Adjusted cash flow from Investment Activities) / (Average Net Operating Assets)
Average Net Operating Assets = Total Assets - Cash - Total Liabilities - Total Debt
Why the Accrual Ratio CF Matters for Investors
Reported earnings can be manipulated. Cash flow cannot. The Accrual Ratio CF bridges this gap — it tells you whether a company's profits are backed by real cash generation or built on accounting entries that may not persist.
Richard Sloan (University of Michigan, 1996) documented the "accrual anomaly": companies with low or negative accruals significantly outperform those with high accruals over subsequent years. Investors who focus only on reported earnings tend to overvalue high-accrual companies, leading to disappointment when those earnings fail to repeat.
The cash flow version of the accrual ratio (CF) is considered more robust than the balance sheet version because it uses actual operating and investing cash flows rather than balance sheet changes, which can be distorted by acquisitions or foreign exchange movements.
Accrual Ratio CF vs Accrual Ratio (Balance Sheet) — What's the Difference?
Both ratios measure earnings quality, but they use different inputs:
- Accrual Ratio CF (Cash Flow): Uses the cash flow statement — specifically operating and investing cash flows. More reliable because cash flows are harder to manipulate than balance sheet figures.
- Accrual Ratio (Balance Sheet): Uses the change in net operating assets. Can be distorted by acquisitions, disposals, and currency effects.
For most screening purposes, the CF version is preferred.
How to Use the Accrual Ratio CF in the Quant Investing Screener
The Accrual Ratio CF is available in the screener for all 22,000+ companies. Unlike most ratios where lower percentile = worse companies, here the most negative values represent the highest quality companies.
Important: To screen for the top 20% of companies by earnings quality, set the slider from 100% to 80% — not from 0% to 20% as with most other ratios. This is because you want the largest negative values, which sit at the high end of the distribution.
More negative is better
The best companies are those with biggest negative Accrual Ratio CF value. This is because of depreciation (a non cash expense) is deducted to get to Net profit but added back to get Cash Flow from Operating Activities.
How to select the best 20% Accrual Ratio (CF) companies
To get the 20% of companies with the best Accrual Ratio CF (lowest accruals) set the slider from 100% to 80%.
Important! This setting is different to most other settings where you normally set the slider from 0% to 20% to select the best companies.
Use it for the Millennial Money strategy
Even though this ratio is not the exact same ratio you can use it to implement The Millenial Money investment strategy mentioned in his great book by Patrick O'shaughnessy.
Screen Stocks Using the Cash Flow Accrual Ratio
The Quant Investing screener includes Accrual Ratio CF (Cash Flow) as one of 110+ ratios you can use to filter and rank 22,000+ companies worldwide. Combine it with other ratios to build your own investment screens.
Screen 22,000+ Companies Using the Accrual Ratio
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Frequently Asked Questions
What is a good Accrual Ratio CF value?
A negative Accrual Ratio CF is good — the more negative, the better. It means the company generates more cash than it reports as accounting profit. A value of −0.10 or lower is generally considered high earnings quality. Positive values above +0.10 are a warning sign that reported profits may not be sustainable.
Why do I set the screener slider from 100% to 80% for this ratio?
Because the best companies have the largest negative values, which rank at the high end of the distribution. Most ratios in the screener rank from 0% (worst) to 100% (best). The Accrual Ratio CF is one of the few where you deliberately select the top-end of the slider to capture the best companies.
What's the difference between Accrual Ratio CF and Accrual Ratio Balance Sheet?
Both measure earnings quality, but use different data sources. The CF version compares net profit to actual operating and investing cash flows. The Balance Sheet version measures the change in net operating assets. The CF version is generally considered more reliable because cash flow statements are harder to manipulate than balance sheet entries.
Can the Accrual Ratio CF be used with other investment strategies?
Yes. Patrick O'Shaughnessy's Millennial Money strategy incorporates an accruals-based measure alongside momentum and value factors. The Quant Investing screener includes a closely related version of this ratio that you can combine with price momentum, earnings yield, and other factors to build a multi-factor strategy.
Is a very large negative Accrual Ratio CF always a good sign?
Generally yes, but extreme negative values can sometimes reflect large non-cash depreciation charges rather than superior business quality. Always confirm by checking operating cash flow margin alongside the ratio. In most cases, a consistently negative Accrual Ratio CF across multiple years is one of the strongest indicators of durable earnings quality.
Put Earnings Quality to Work in Your Portfolio
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By Tim du Toit — 20+ years of quantitative investing experience, author of Quantitative Value Investing in Europe (Amazon), founder of quant-investing.com.