The profitability of trading NOA and accruals: One effect or two?

This paper documents a negative relationship between future stock returns and each of accruals and net operating assets (NOA). While accruals and NOA convey unique information for future returns, NOA appears to have an important moderating influence on the accrual effect. A significant accrual effect is observed amongst stocks with high NOA. In contrast, no accrual effect exists for stocks with low NOA. This finding suggests that high levels of accruals per se are not bad news. An accrual effect only arises for firms that have a sustained track record of not converting accruals into cashflow.