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
AppLovin Corp., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 7,259,610) | 5,869,259) | 5,359,187) | 5,847,846) | 6,163,579) | |
| Less: Cash and cash equivalents | 2,487,096) | 741,411) | 502,152) | 1,080,484) | 1,520,504) | |
| Less: Restricted cash equivalents | —) | —) | —) | —) | 1,050,000) | |
| Operating assets | 4,772,514) | 5,127,848) | 4,857,035) | 4,767,362) | 3,593,075) | |
| Operating Liabilities | ||||||
| Total liabilities | 5,124,939) | 4,779,441) | 4,102,858) | 3,945,169) | 4,025,288) | |
| Less: Finance lease liabilities, current | 17,481) | 22,336) | 19,683) | 22,304) | 21,999) | |
| Less: Short-term debt | —) | —) | 215,000) | 33,310) | 25,810) | |
| Less: Long-term debt | 3,512,987) | 3,508,983) | 2,905,906) | 3,178,412) | 3,201,834) | |
| Less: Finance lease liabilities, non-current | 105,172) | 133,893) | 144,174) | 44,736) | 24,085) | |
| Operating liabilities | 1,489,299) | 1,114,229) | 818,095) | 666,407) | 751,560) | |
| Net operating assets1 | 3,283,215) | 4,013,619) | 4,038,940) | 4,100,955) | 2,841,515) | |
| Balance-sheet-based aggregate accruals2 | (730,404) | (25,321) | (62,015) | 1,259,440) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -20.02% | -0.63% | -1.52% | 36.28% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Accenture PLC | 2.83% | 35.69% | 16.32% | 21.70% | 27.93% | |
| Adobe Inc. | -5.28% | -3.83% | 1.85% | -8.24% | 14.14% | |
| Cadence Design Systems Inc. | 9.47% | 39.84% | 11.17% | 26.65% | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Datadog Inc. | 53.88% | -28.51% | -35.73% | 17.56% | — | |
| International Business Machines Corp. | 16.28% | 2.79% | 2.42% | 1.55% | — | |
| Intuit Inc. | 3.52% | 3.35% | -1.74% | 85.68% | 139.73% | |
| Microsoft Corp. | 21.81% | 52.18% | 22.96% | 42.27% | 40.52% | |
| Oracle Corp. | 20.79% | 4.30% | 51.77% | 9.90% | 5.62% | |
| Palantir Technologies Inc. | 509.21% | — | — | — | — | |
| Palo Alto Networks Inc. | 32.24% | 89.91% | 137.01% | -124.73% | 85.21% | |
| Salesforce Inc. | 0.71% | -2.46% | -2.30% | 57.74% | — | |
| ServiceNow Inc. | 41.98% | 22.91% | 61.79% | 12.89% | — | |
| Synopsys Inc. | 154.48% | 7.85% | 13.85% | 5.01% | 0.36% | |
| Workday Inc. | 20.74% | 28.44% | -11.24% | 55.93% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Software & Services | 21.94% | 26.16% | 18.26% | 29.59% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 14.51% | 21.35% | 8.92% | 18.19% | — | |
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= 4,772,514 – 1,489,299 = 3,283,215
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= 3,283,215 – 4,013,619 = -730,404
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -730,404 ÷ [(3,283,215 + 4,013,619) ÷ 2] = -20.02%
4 Click competitor name to see calculations.
The reported net operating assets exhibited a slight decline over the observed period, decreasing from US$4,100,955 thousand in 2022 to US$3,283,215 thousand in 2025. However, the balance-sheet-based aggregate accruals and the corresponding accruals ratio demonstrate a more pronounced shift, indicating a changing relationship between reported earnings and underlying cash flows.
- Balance-Sheet-Based Aggregate Accruals
- In 2022, aggregate accruals were substantial, totaling US$1,259,440 thousand. This figure represents a significant portion of net operating assets. A dramatic reversal is then observed in 2023, with accruals becoming negative at -US$62,015 thousand. This negative trend continues through 2024 (-US$25,321 thousand) and accelerates considerably in 2025, reaching -US$730,404 thousand. The progression suggests a decreasing reliance on accruals to bolster reported income, or potentially, a liquidation of previously built-up accruals.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrors the trend in aggregate accruals. Starting at 36.28% in 2022, the ratio declines sharply to -1.52% in 2023. Further decreases are noted in 2024 (-0.63%) and 2025 (-20.02%). The movement from a positive and substantial percentage in 2022 to a significantly negative percentage in 2025 is noteworthy. This indicates that accruals are not only decreasing in absolute terms but are becoming a drag on reported earnings relative to cash flows. A ratio of this magnitude warrants further investigation into the underlying drivers of the change.
The substantial shift in both aggregate accruals and the accruals ratio over the four-year period suggests a fundamental change in the company’s earnings quality. The initial high accruals in 2022 could indicate aggressive revenue recognition or expense deferral. The subsequent decline and eventual negative accruals suggest a reversal of these practices, a more conservative accounting approach, or potentially, underlying operational challenges impacting cash flow generation. The increasing negative accruals ratio in later years requires careful scrutiny to determine if it reflects prudent financial management or potential concerns regarding the sustainability of reported earnings.
AI Ask an analyst for more
Cash-Flow-Statement-Based Accruals Ratio
AppLovin Corp., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to AppLovin | 3,333,751) | 1,579,776) | 356,711) | (192,746) | 35,446) | |
| Less: Net cash provided by operating activities | 3,971,094) | 2,099,011) | 1,061,510) | 412,773) | 361,851) | |
| Less: Net cash (used in) provided by investing activities | 358,428) | (106,754) | (77,829) | (1,371,468) | (1,214,930) | |
| Cash-flow-statement-based aggregate accruals | (995,771) | (412,481) | (626,970) | 765,949) | 888,525) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -27.29% | -10.24% | -15.40% | 22.07% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Accenture PLC | -6.95% | 24.31% | -0.19% | 11.87% | 11.80% | |
| Adobe Inc. | -14.85% | -21.90% | -21.73% | -19.93% | 9.21% | |
| Cadence Design Systems Inc. | -3.48% | 17.36% | 3.78% | 15.03% | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Datadog Inc. | 206.67% | 30.92% | 53.36% | -34.44% | — | |
| International Business Machines Corp. | 10.47% | -3.73% | 0.99% | -7.22% | — | |
| Intuit Inc. | -0.10% | -8.44% | -8.74% | 25.60% | 58.72% | |
| Microsoft Corp. | 12.55% | 30.89% | 5.22% | 13.42% | 17.68% | |
| Oracle Corp. | 13.98% | -1.01% | 42.79% | -30.58% | 25.81% | |
| Palantir Technologies Inc. | 2,593.23% | — | — | — | — | |
| Palo Alto Networks Inc. | -8.91% | 33.84% | -37.95% | -196.64% | -68.30% | |
| Salesforce Inc. | -6.66% | -8.44% | -8.49% | 21.96% | — | |
| ServiceNow Inc. | -29.72% | -7.12% | 15.44% | 8.80% | — | |
| Synopsys Inc. | 71.60% | -7.64% | 0.20% | -4.64% | -4.88% | |
| Workday Inc. | -4.25% | 34.56% | 18.64% | -0.65% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Software & Services | 10.41% | 11.97% | 7.19% | 2.21% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 6.09% | 6.25% | 1.40% | 2.99% | — | |
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -995,771 ÷ [(3,283,215 + 4,013,619) ÷ 2] = -27.29%
2 Click competitor name to see calculations.
The reported net operating assets exhibited a slight decline over the four-year period, decreasing from US$4,100,955 thousand in 2022 to US$3,283,215 thousand in 2025. However, the cash-flow-statement-based aggregate accruals and the corresponding accruals ratio demonstrate a more pronounced shift, moving from positive accruals to increasingly negative values.
- Cash-Flow-Statement-Based Aggregate Accruals
- In 2022, aggregate accruals were positive at US$765,949 thousand. This indicates that net operating assets were being supported by accruals. However, a significant reversal occurred in 2023, with accruals becoming negative at -US$626,970 thousand. This trend continued in subsequent years, with accruals reaching -US$412,481 thousand in 2024 and further declining to -US$995,771 thousand in 2025. The magnitude of negative accruals increased substantially over the period.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrored the trend in aggregate accruals. In 2022, the ratio was 22.07%, suggesting a substantial portion of reported earnings was attributable to accruals. The ratio turned negative in 2023, reaching -15.40%, and continued to decrease, reaching -10.24% in 2024. By 2025, the accruals ratio had fallen to -27.29%. This indicates a growing divergence between reported earnings and actual cash flows from operations, with a larger proportion of earnings being derived from non-cash items or accounting choices.
The consistent shift from positive to negative accruals, coupled with the increasing negative accruals ratio, warrants further investigation. A sustained pattern of negative accruals may suggest potential concerns regarding the quality of earnings, potentially indicating aggressive revenue recognition or delayed expense recognition. The increasing magnitude of the negative ratio suggests this trend is accelerating.
AI Ask an analyst for more