Technicals Stability Returns

Understanding Accruals Ratio

Accruals Ratio measures the company's revenue and incurred expenses that impact its income statement and balance sheet, representing its non-cash assets and liabilities.

This ratio includes account receivable, accounts payable, future tax liabilities, future expenses, accrued interest earned or payable.

When Free Cash Flow is higher than Net Income or Cash Earnings are higher than Accrued Earnings, then accruals ratio is negative and considered good.

By measuring this financial metric, analysts can identify how sustainable a company's earnings are.

The formula for Accruals Ratio

Accruals Ratio

Example: For the financial year, United Spirits reported Net Income as Rs. 383.60 Cr., Free Cash Flow as Rs. 1644, and Total Assets as Rs. 8537 Cr.
The value as per the formula (Net Income - Free Cash Flow / Total Assets) is calculated as (383.60 - 1644 / 8537) = -0.15.