Earnings quality · updated October 21, 2026

What is the Sloan ratio and how is it calculated

The Sloan ratio shows how much of reported profit exists only on paper, meaning it has not been collected as cash yet. Professor Richard Sloan showed that companies with a lot of "paper" profit tend to do worse in the following years.

The Sloan ratio formula

Sloan ratio=Net profit − Cash from operations − Cash from investingTotal assets× 100

Net profit: Accounting profit over the last 12 months.
Cash from operations and from investing: Cash coming in from the business, and cash going out to (or coming in from) investments.
Total assets: Everything the company owns.

Worked example

A company with $20 billion of assets reports $2 billion of profit, but brings in $1.2 billion from operations and spends $0.2 billion on investment.

$1 bn2 − 1.2 − (−0.2)

$20 bnassets

5%Sloan ratio

5% of assets is uncollected profit. That is in the normal range.

How to read the Sloan ratio

Below −10% or negativeprofit backed by cash

−10% to 10%normal

Above 10%a lot of paper-only profit

A small or negative ratio is what you want to see: profit comes from cash actually collected.

When the Sloan ratio can fool you

Fast-growing companies: inventory and receivables naturally grow and push the ratio up.

Questions about the Sloan ratio

Why does "paper" profit matter?

Because accounting estimates (receivables, inventory, provisions) usually reverse in the following years. Profit backed by real cash is safer.

These explanations are for information only. They are not a recommendation to buy or sell.

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