Definition
The Sloan Ratio, developed by accounting professor Richard Sloan in 1996, measures the proportion of a company's earnings that comes from accruals (accounting entries) rather than actual cash. High-accrual companies — those reporting profits not backed by cash — tend to underperform.
Formula
Sloan Ratio = (Net Income − OCF − ICF) ÷ Total Assets
Net Income = Reported after-tax profit
OCF = Operating cash flow
ICF = Investing cash flow (negative when the company is investing)
Total Assets = Total assets on the balance sheet
A simpler variant uses just (Net Income − Operating Cash Flow) ÷ Total Assets. Both measure the same thing: how much of reported earnings is accrual-based rather than cash-based.
How to interpret it
Below −10%
Strong cash backing — earnings are conservative relative to actual cash generation
−10% to +10%
Normal — earnings and cash flow are reasonably aligned
Above +10%
Red flag — reported profits significantly exceed cash generation
Worked example
Worked example
Net Income$120M
Operating Cash Flow$180M
Investing Cash Flow−$50M
Total Assets$1,200M
Sloan Ratio = ($120M − $180M − (−$50M)) ÷ $1,200M−0.83%
A near-zero Sloan Ratio here means earnings and cash flows are well-aligned — the company isn't inflating profits with accrual tricks. A company reporting $120M profit on only $60M operating cash flow would score much higher, flagging potential earnings quality issues.