Financial Reporting Quality: Aggregate Accruals
Earnings can be decomposed into cash and accrual components. The accrual component (aggregate accruals) has been found to have less persistence than the cash component, and therefore (1) earnings with higher accrual component are less persistent than earnings with smaller accrual component, all else equal; and (2) the cash component of earnings should receive a higher weighting evaluating company performance.
Balance-Sheet-Based Accruals Ratio
Analog Devices Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Nov 2, 2024 | Oct 28, 2023 | Oct 29, 2022 | Oct 30, 2021 | Oct 31, 2020 | Nov 2, 2019 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 48,228,277) | 48,794,478) | 50,302,350) | 52,322,071) | 21,468,603) | 21,392,641) | |
| Less: Cash and cash equivalents | 1,991,342) | 958,061) | 1,470,572) | 1,977,964) | 1,055,860) | 648,322) | |
| Less: Short-term investments | 371,822) | —) | —) | —) | —) | —) | |
| Operating assets | 45,865,113) | 47,836,417) | 48,831,778) | 50,344,107) | 20,412,743) | 20,744,319) | |
| Operating Liabilities | |||||||
| Total liabilities | 13,051,960) | 13,229,356) | 13,837,027) | 14,329,529) | 9,470,658) | 9,683,453) | |
| Less: Debt, current | 399,636) | 499,052) | —) | 516,663) | —) | 299,667) | |
| Less: Commercial paper notes | 547,738) | 547,224) | —) | —) | —) | —) | |
| Less: Long-term debt, excluding current | 6,634,313) | 5,902,457) | 6,548,625) | 6,253,212) | 5,145,102) | 5,192,252) | |
| Operating liabilities | 5,470,273) | 6,280,623) | 7,288,402) | 7,559,654) | 4,325,556) | 4,191,534) | |
| Net operating assets1 | 40,394,840) | 41,555,794) | 41,543,376) | 42,784,453) | 16,087,187) | 16,552,785) | |
| Balance-sheet-based aggregate accruals2 | (1,160,954) | 12,418) | (1,241,077) | 26,697,266) | (465,598) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | -2.83% | 0.03% | -2.94% | 90.70% | -2.85% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Advanced Micro Devices Inc. | 2.94% | 2.36% | 169.75% | 8.05% | — | — | |
| Applied Materials Inc. | 4.18% | 0.48% | 20.73% | 17.33% | 3.75% | — | |
| Broadcom Inc. | 87.89% | -1.58% | -5.37% | -8.72% | 8.42% | — | |
| Intel Corp. | -0.91% | 13.69% | 10.73% | 11.61% | — | — | |
| KLA Corp. | -1.32% | 3.95% | 21.25% | 3.62% | -4.49% | — | |
| Lam Research Corp. | -2.70% | 1.57% | 16.02% | 8.38% | 9.01% | — | |
| Micron Technology Inc. | 5.22% | 0.78% | 12.07% | 11.51% | 7.56% | — | |
| NVIDIA Corp. | 29.90% | 18.88% | 28.31% | 115.40% | — | — | |
| Qualcomm Inc. | 7.33% | -5.53% | 68.49% | 22.56% | 20.94% | — | |
| Texas Instruments Inc. | 15.89% | 31.37% | 22.75% | 18.48% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Semiconductors & Semiconductor Equipment | 19.65% | 6.33% | 24.66% | 19.53% | 200.00% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Information Technology | 21.42% | 8.98% | 18.09% | 19.16% | 200.00% | — | |
Based on: 10-K (reporting date: 2024-11-02), 10-K (reporting date: 2023-10-28), 10-K (reporting date: 2022-10-29), 10-K (reporting date: 2021-10-30), 10-K (reporting date: 2020-10-31), 10-K (reporting date: 2019-11-02).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 45,865,113 – 5,470,273 = 40,394,840
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 40,394,840 – 41,555,794 = -1,160,954
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,160,954 ÷ [(40,394,840 + 41,555,794) ÷ 2] = -2.83%
4 Click competitor name to see calculations.
The data exhibits significant fluctuations in the financial reporting quality measures over the five-year period from October 31, 2020, to November 2, 2024. Notably, net operating assets witnessed a substantial increase between 2020 and 2021, rising from approximately 16.1 billion US dollars to 42.8 billion US dollars. However, from 2021 onward, the net operating assets stabilized and showed a slight declining trend, ending at approximately 40.4 billion US dollars in 2024.
The balance-sheet-based aggregate accruals demonstrate considerable volatility throughout the period. In 2020, the accruals were negative at approximately -466 million US dollars, then sharply increased to a positive peak of approximately 26.7 billion US dollars in 2021. This extreme rise was followed by a return to nearly neutral values by 2023, and a negative value again in 2024, close to -1.16 billion US dollars. This pattern indicates episodic large swings in accruals, suggesting potential variability in earnings quality or recognition timing of revenues and expenses in certain years.
The balance-sheet-based accruals ratio mirrors the pattern of aggregate accruals and is extremely sensitive to these changes. It fluctuated from -2.85% in 2020 to a pronounced spike of 90.7% in 2021. Subsequently, it reverted to values near zero and returned to negative at -2.83% in 2024. The abnormal spike in 2021 indicates a year with unusually high accruals relative to net assets, which may reflect either significant operational adjustments or accounting anomalies affecting the quality and sustainability of earnings during that period.
Overall, the data suggests that while net operating assets have remained relatively stable after a large increase, the accrual measures have shown extreme variability, with a notable aberration in 2021. These fluctuations in accruals could impact the reliability of reported earnings and may warrant closer examination to assess the underlying causes of such changes in financial reporting quality.
Cash-Flow-Statement-Based Accruals Ratio
Analog Devices Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Nov 2, 2024 | Oct 28, 2023 | Oct 29, 2022 | Oct 30, 2021 | Oct 31, 2020 | Nov 2, 2019 | ||
|---|---|---|---|---|---|---|---|
| Net income | 1,635,273) | 3,314,579) | 2,748,561) | 1,390,422) | 1,220,761) | 1,363,011) | |
| Less: Net cash provided by operating activities | 3,852,529) | 4,817,634) | 4,475,402) | 2,735,069) | 2,008,487) | 2,253,100) | |
| Less: Net cash (used for) provided by investing activities | (1,104,858) | (1,266,385) | (657,368) | 2,143,525) | (180,523) | (293,186) | |
| Cash-flow-statement-based aggregate accruals | (1,112,398) | (236,670) | (1,069,473) | (3,488,172) | (607,203) | (596,903) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | -2.71% | -0.57% | -2.54% | -11.85% | -3.72% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Advanced Micro Devices Inc. | -0.56% | 1.17% | -15.28% | 8.10% | — | — | |
| Applied Materials Inc. | 5.35% | -2.05% | 18.18% | 14.75% | -0.54% | — | |
| Broadcom Inc. | 10.29% | -6.71% | -8.94% | -12.34% | 3.65% | — | |
| Intel Corp. | -6.58% | 11.35% | 2.75% | 15.15% | — | — | |
| KLA Corp. | 16.82% | 3.66% | 18.30% | 9.27% | -7.11% | — | |
| Lam Research Corp. | -5.83% | -1.71% | 12.43% | 3.89% | 6.35% | — | |
| Micron Technology Inc. | 1.18% | -2.52% | 11.37% | 10.01% | 5.45% | — | |
| NVIDIA Corp. | 52.67% | -47.90% | 73.13% | 233.25% | — | — | |
| Qualcomm Inc. | 5.53% | -14.57% | 46.91% | 15.61% | 48.48% | — | |
| Texas Instruments Inc. | 7.93% | 26.35% | 28.24% | 29.95% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Semiconductors & Semiconductor Equipment | 3.46% | 0.45% | 7.45% | 12.36% | 7.12% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Information Technology | 6.29% | 1.46% | 2.91% | 8.62% | -15.54% | — | |
Based on: 10-K (reporting date: 2024-11-02), 10-K (reporting date: 2023-10-28), 10-K (reporting date: 2022-10-29), 10-K (reporting date: 2021-10-30), 10-K (reporting date: 2020-10-31), 10-K (reporting date: 2019-11-02).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,112,398 ÷ [(40,394,840 + 41,555,794) ÷ 2] = -2.71%
2 Click competitor name to see calculations.
The data reveals notable fluctuations and trends in financial reporting quality measures over the five annual periods analyzed.
- Net Operating Assets
- There is a substantial increase in net operating assets from approximately 16.1 billion US dollars in the fiscal year ending October 31, 2020, to about 42.8 billion US dollars in the following year, representing more than a twofold rise. Subsequently, this figure stabilizes around 41.5 billion US dollars for the next two years (ending October 29, 2022 and October 28, 2023) before showing a slight decline to roughly 40.4 billion US dollars by November 2, 2024. This pattern indicates a period of rapid asset growth followed by a plateau and modest decrease.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals are negative throughout the period, indicating that operating cash flows exceed net income, which can be indicative of conservative earnings reporting. The value worsens significantly from -607 million US dollars in 2020 to nearly -3.5 billion US dollars in 2021, suggesting an increase in the magnitude of accruals. This large negative peak is followed by a rebound towards less negative figures in 2022 and 2023 (-1.07 billion and -237 million, respectively), before increasing again to approximately -1.1 billion US dollars in 2024. The trend shows volatility with a sharp drop in 2021, partial recovery, and another increase, indicating fluctuating cash flow dynamics relative to earnings.
- Cash-flow-statement-based Accruals Ratio
- This ratio fluctuates in tandem with aggregate accruals, remaining negative in all periods, reflecting ongoing conservative earnings management where cash flows exceed reported earnings. The ratio dips from -3.72% in 2020 to a pronounced -11.85% in 2021, which aligns with the peak in aggregate accruals. It then recovers considerably to -2.54% and -0.57% in the subsequent two years, before worsening again to -2.71% in the 2024 period. These fluctuations illustrate varying degrees of accruals relative to net operating assets, with 2021 standing out as a year of significant divergence.
Overall, the data suggests a substantial expansion in net operating assets early in the period, followed by stabilization and slight contraction. Cash-flow-based accrual measures show considerable volatility, with 2021 marking a peak in accrual magnitude and ratio, implying notable shifts in earnings quality or cash flow performance during that year. The pattern of negative accruals ratios throughout indicates a persistent conservative bias in financial reporting across the years analyzed.