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
Axon Enterprise Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 2,851,894) | 1,688,210) | 1,381,023) | 845,639) | 719,540) | |
| Less: Cash and cash equivalents | 353,684) | 356,332) | 155,440) | 172,250) | 349,462) | |
| Less: Marketable securities | 39,240) | 72,180) | —) | —) | —) | |
| Less: Short-term investments | 581,769) | 14,510) | 406,525) | 178,534) | —) | |
| Operating assets | 1,877,201) | 1,245,188) | 819,058) | 494,855) | 370,078) | |
| Operating Liabilities | ||||||
| Total liabilities | 1,583,403) | 640,361) | 404,768) | 302,144) | 252,216) | |
| Less: Convertible notes, net | 673,967) | —) | —) | —) | —) | |
| Operating liabilities | 909,436) | 640,361) | 404,768) | 302,144) | 252,216) | |
| Net operating assets1 | 967,765) | 604,827) | 414,290) | 192,711) | 117,862) | |
| Balance-sheet-based aggregate accruals2 | 362,938) | 190,537) | 221,579) | 74,849) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 46.16% | 37.39% | 73.01% | 48.20% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Boeing Co. | -12.09% | — | — | — | — | |
| Caterpillar Inc. | 1.82% | — | — | — | — | |
| Eaton Corp. plc | 2.87% | — | — | — | — | |
| GE Aerospace | -7.82% | — | — | — | — | |
| Honeywell International Inc. | -1.99% | — | — | — | — | |
| Lockheed Martin Corp. | 15.67% | — | — | — | — | |
| RTX Corp. | 1.57% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Capital Goods | -0.33% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | 0.67% | 200.00% | — | — | — | |
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 1,877,201 – 909,436 = 967,765
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 967,765 – 604,827 = 362,938
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 362,938 ÷ [(967,765 + 604,827) ÷ 2] = 46.16%
4 Click competitor name to see calculations.
The financial data indicates a substantial expansion in the scale of operating assets alongside fluctuating accrual levels between 2019 and 2022. Net operating assets grew consistently throughout the period, increasing from 192.7 million USD in 2019 to 967.8 million USD by the end of 2022. While balance-sheet-based aggregate accruals also trended upward over the four-year duration, the growth was non-linear, reaching 362.9 million USD in 2022 following a slight contraction in 2021.
- Net Operating Assets Trend
- A consistent and aggressive upward trajectory is observed, with net operating assets nearly quintupling over the analyzed period. This progression reflects a significant increase in the company's operational asset base.
- Aggregate Accruals Analysis
- Balance-sheet-based aggregate accruals rose from 74.8 million USD in 2019 to 221.6 million USD in 2020, followed by a moderate reduction to 190.5 million USD in 2021, and a subsequent increase to 362.9 million USD in 2022. This volatility suggests varying degrees of divergence between accrual-based accounting measures and cash flow realizations.
- Balance-Sheet-Based Accruals Ratio Interpretation
- The accruals ratio exhibits significant volatility, starting at 48.20% in 2019 and peaking at 73.01% in 2020. A sharp decrease occurred in 2021, with the ratio falling to 37.39%, before rising again to 46.16% in 2022. The peak in 2020 indicates a period where a higher proportion of net operating assets was comprised of accruals, which typically suggests a temporary decrease in earnings quality. The reduction in 2021 signifies a strengthening of the relationship between cash flows and assets, although the increase in 2022 suggests a partial return to higher accrual levels.
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Cash-Flow-Statement-Based Accruals Ratio
Axon Enterprise Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income (loss) | 147,139) | (60,018) | (1,724) | 882) | 29,205) | |
| Less: Net cash provided by operating activities | 235,361) | 124,494) | 38,481) | 65,673) | 63,875) | |
| Less: Net cash (used in) provided by investing activities | (830,967) | 252,556) | (356,526) | (240,737) | (9,860) | |
| Cash-flow-statement-based aggregate accruals | 742,745) | (437,068) | 316,321) | 175,946) | (24,810) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 94.46% | -85.77% | 104.22% | 113.30% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Boeing Co. | -50.32% | — | — | — | — | |
| Caterpillar Inc. | 3.26% | — | — | — | — | |
| Eaton Corp. plc | 4.55% | — | — | — | — | |
| GE Aerospace | -15.92% | — | — | — | — | |
| Honeywell International Inc. | -0.79% | — | — | — | — | |
| Lockheed Martin Corp. | -1.36% | — | — | — | — | |
| RTX Corp. | 0.87% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Capital Goods | -5.98% | -27.73% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | -2.30% | -17.51% | — | — | — | |
Based on: 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 742,745 ÷ [(967,765 + 604,827) ÷ 2] = 94.46%
2 Click competitor name to see calculations.
An analysis of financial reporting quality from 2019 to 2022 reveals a period of substantial asset expansion characterized by significant volatility in cash-flow-statement-based accruals.
- Net Operating Assets Expansion
- A consistent upward trend is observed in net operating assets, which grew from US$ 192,711 thousand in 2019 to US$ 967,765 thousand by December 31, 2022. This represent a roughly five-fold increase over the four-year period, indicating a steady growth in the company's operating base.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals exhibited a non-linear and volatile pattern. Initial growth was noted between 2019 and 2020, followed by a sharp reversal in 2021, where accruals shifted to a negative value of US$ -437,068 thousand. This was succeeded by a significant rebound in 2022, reaching a period high of US$ 742,745 thousand.
- Accruals Ratio Performance
- The accruals ratio closely mirrored the volatility of the aggregate accruals. The ratio began at 113.30% in 2019 and remained elevated at 104.22% in 2020. A substantial decline occurred in 2021, with the ratio falling to -85.77%, before returning to a high positive level of 94.46% in 2022. The wide swings in this ratio, contrasted against the linear growth of net operating assets, suggest significant fluctuations in the relationship between reported earnings and actual cash flow generated from operations.
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