Balance Sheet Based accruals ratio

Hi,

Can anyone explain me what does the Balance Sheet Accruals Ration mean?

I see that it is calculated as Change In Net Operating Assets / Average Net Operating Assets but I cannot see the rational behind this calculation. Higher values would imply higher accruals recorded in the year? If so, why?

Thank you!

By some reason I’m not able to copy / paste in the forum. If you want, search my explanation from 29/05/2015. The name of the topic was “doubts on accruals”.

Hi,

I found your explanation and it is very helpful. However I still have some doubts.

If for example you buy an asset, let’s say a piece of machinery through a loan. In this case net operating assets (calculated as total assets minus cash and short term inv) would increase by an amount equal to the price of the machinery.

On the other hand, operating liabilities (calculated as total liabilities minus debt) would remain the same because the figure does not include debt.

As a consequnce there would be an increase in net operating assets but in this case it would not be due to an increase in working capital but it would be a consequence of an investment. There would be no accruals here.

Am i still wrong in something?

Thanks again!

guidoluc , you’re right that in the year the investment is made the balance sheet accrual ratio will be higher. But this ratio is supposed to be examined for several years in a row. Let’s think about the business- why somebody would make an investment in either current or long-term asset? Because he expects this investment will generate enough future cash inflows. Any business cannot survive more that several years without sufficient real cash returns (the only exception I can think of are financial pyramids but even they crash after awhile). Take for example one of the other used ratios (CFO + interest paid + taxes paid) / EBIT. It’s fine one year to be less than 1, let’s say 0.7, but if this trend continue for several years you better think twice before investing in this company.

Aaaah very ture. Yeah, now it makes completly sense to me.

Thanks a lot again and best of luck for the exam!