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Earnings Quality & Accrual Screener Formula Breakdown
Reported GAAP accounting profit on the bottom line of the income statement.
Actual cash collected from customers after settling operating working capital expenses.
Non-cash earnings component: Net Income minus Operating Cash Flow.
Percentage of reported net income converted into real cash flow: (CFO / Net Income) × 100.
How to Calculate Earnings Quality Step-by-Step
Extract trailing Net Income and Operating Cash Flow (CFO) from certified financial filings.
Calculate Total Accruals by subtracting Operating Cash Flow from Net Income.
Divide Total Accruals by Total Assets to generate the standardized Sloan Accrual Ratio.
Calculate Cash Conversion % (Cash Flow to Net Income ratio).
Deliver an Earnings Quality verdict: Pristine Cash-Backed, Good Quality, or Accounting Warning.
How to Interpret the Result
Frequently Asked Questions
What is Professor Richard Sloan's Accrual Anomaly?
In 1996, Wharton professor Richard Sloan proved that companies with high non-cash accruals systematically underperform companies whose earnings are backed by strong operating cash flows over multi-year horizons.
Why does Operating Cash Flow differ from Net Income?
Net Income relies on accrual accounting—recognizing revenue when billed rather than when paid. Operating Cash Flow measures only actual cash dollars moving in and out of company accounts.
What is an earnings quality red flag?
When Net Income grows steadily while Operating Cash Flow stagnates or falls for several consecutive quarters, it suggests aggressive revenue recognition, unpaid receivables, or capitalized expenses.
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