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
CSX Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 41,912) | 40,531) | 39,793) | 38,257) | 36,729) | |
| Less: Cash and cash equivalents | 1,958) | 2,239) | 3,129) | 958) | 858) | |
| Less: Short-term investments | 129) | 77) | 2) | 996) | 253) | |
| Operating assets | 39,825) | 38,215) | 36,662) | 36,303) | 35,618) | |
| Operating Liabilities | ||||||
| Total liabilities | 29,287) | 27,031) | 26,683) | 26,394) | 24,149) | |
| Less: Current maturities of long-term debt | 151) | 181) | 401) | 245) | 18) | |
| Less: Long-term debt, excluding current portion | 17,896) | 16,185) | 16,304) | 15,993) | 14,739) | |
| Operating liabilities | 11,240) | 10,665) | 9,978) | 10,156) | 9,392) | |
| Net operating assets1 | 28,585) | 27,550) | 26,684) | 26,147) | 26,226) | |
| Balance-sheet-based aggregate accruals2 | 1,035) | 866) | 537) | (79) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 3.69% | 3.19% | 2.03% | -0.30% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| FedEx Corp. | 0.91% | — | — | — | — | |
| Uber Technologies Inc. | -40.74% | — | — | — | — | |
| Union Pacific Corp. | 3.63% | — | — | — | — | |
| United Airlines Holdings Inc. | 3.50% | — | — | — | — | |
| United Parcel Service Inc. | 26.54% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Transportation | 2.58% | 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
= 39,825 – 11,240 = 28,585
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 28,585 – 27,550 = 1,035
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,035 ÷ [(28,585 + 27,550) ÷ 2] = 3.69%
4 Click competitor name to see calculations.
The financial data exhibits a consistent upward trajectory in both the scale of operating assets and the magnitude of aggregate accruals over the four-year period ending December 31, 2022. A notable transition is observed in the accruals ratio, which shifted from a negative value in 2019 to a steadily increasing positive percentage through 2022.
- Net Operating Assets
- A steady increase in net operating assets is observed, rising from 26,147 million US dollars in 2019 to 28,585 million US dollars by the end of 2022. This represents a continuous expansion of the asset base utilized in core operations.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals underwent a significant reversal, moving from a negative balance of 79 million US dollars in 2019 to a positive 537 million US dollars in 2020. This upward trend continued through 2021 and 2022, reaching 1,035 million US dollars.
- Balance-sheet-based Accruals Ratio
- The accruals ratio reflects the aforementioned trends, starting at -0.30% in 2019 and climbing progressively to 2.03% in 2020, 3.19% in 2021, and finally 3.69% in 2022. This indicates that accruals have occupied a larger proportion of net operating assets over time.
The progression from negative to increasingly positive accruals suggests a shift in the composition of reported earnings relative to cash flows. The rising ratio indicates that non-cash accounting adjustments are contributing more significantly to the reported financial results, which is a key metric in evaluating the quality of earnings and financial reporting stability.
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Cash-Flow-Statement-Based Accruals Ratio
CSX Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net earnings | 4,166) | 3,781) | 2,765) | 3,331) | 3,309) | |
| Less: Net cash provided by operating activities | 5,619) | 5,099) | 4,263) | 4,850) | 4,641) | |
| Less: Net cash used in investing activities | (2,131) | (1,877) | (649) | (2,102) | (1,684) | |
| Cash-flow-statement-based aggregate accruals | 678) | 559) | (849) | 583) | 352) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 2.42% | 2.06% | -3.21% | 2.23% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| FedEx Corp. | 2.12% | — | — | — | — | |
| Uber Technologies Inc. | -49.13% | — | — | — | — | |
| Union Pacific Corp. | 2.53% | — | — | — | — | |
| United Airlines Holdings Inc. | 38.00% | — | — | — | — | |
| United Parcel Service Inc. | 16.44% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Transportation | 4.77% | 2.42% | — | — | — | |
| 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 × 678 ÷ [(28,585 + 27,550) ÷ 2] = 2.42%
2 Click competitor name to see calculations.
Net operating assets demonstrated a consistent upward trajectory over the four-year period, growing from 26,147 million US dollars in 2019 to 28,585 million US dollars by the end of 2022. This steady expansion indicates a gradual increase in the capital invested in the company's operating activities.
- Cash-flow-statement-based aggregate accruals
- Aggregate accruals exhibited significant volatility. After starting at 583 million US dollars in 2019, there was a sharp reversal to a negative 849 million US dollars in 2020. This trend corrected in 2021 and 2022, with values rising to 559 million and 678 million US dollars, respectively.
- Cash-flow-statement-based accruals ratio
- The accruals ratio mirrored the volatility of the aggregate accruals. The ratio shifted from 2.23% in 2019 to -3.21% in 2020, before returning to positive territory at 2.06% in 2021 and increasing further to 2.42% in 2022.
The fluctuations in the accruals ratio suggest a period of significant divergence between reported earnings and cash flows in 2020, followed by a return to a stable pattern. The relatively low magnitude of the positive ratios in 2019, 2021, and 2022 indicates that the majority of operating earnings are supported by cash flows, which is generally associated with higher financial reporting quality.
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