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.
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Cadence Design Systems Inc. pages available for free this week:
- Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Short-term (Operating) Activity Ratios
- Analysis of Geographic Areas
- Enterprise Value (EV)
- Capital Asset Pricing Model (CAPM)
- Present Value of Free Cash Flow to Equity (FCFE)
- Selected Financial Data since 2005
- Net Profit Margin since 2005
- Current Ratio since 2005
- Total Asset Turnover since 2005
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Balance-Sheet-Based Accruals Ratio
Cadence Design Systems Inc., 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 | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Short-term investments | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Revolving credit facility | ||||||
| Less: Current portion of long-term debt | ||||||
| Less: Long-term debt, excluding current portion | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Accenture PLC | ||||||
| Adobe Inc. | ||||||
| AppLovin Corp. | ||||||
| CrowdStrike Holdings Inc. | ||||||
| Datadog Inc. | ||||||
| International Business Machines Corp. | ||||||
| Intuit Inc. | ||||||
| Microsoft Corp. | ||||||
| Oracle Corp. | ||||||
| Palantir Technologies Inc. | ||||||
| Palo Alto Networks Inc. | ||||||
| Salesforce Inc. | ||||||
| ServiceNow Inc. | ||||||
| Synopsys Inc. | ||||||
| Workday Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Software & Services | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | ||||||
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
= – =
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= – =
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
4 Click competitor name to see calculations.
The information presents a review of net operating assets, aggregate accruals, and the resulting accruals ratio over a four-year period. A notable fluctuation in the balance-sheet-based accruals ratio is observed, warranting further investigation.
- Net Operating Assets
- Net operating assets demonstrate a consistent upward trend throughout the period. Beginning at US$2,606,376 thousand in 2022, they increased to US$2,914,816 thousand in 2023, then experienced a more substantial rise to US$4,365,106 thousand in 2024, and concluded at US$4,798,801 thousand in 2025. This indicates overall growth in the company’s operational investments.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals exhibit a more volatile pattern. They began at US$613,009 thousand in 2022, decreased significantly to US$308,440 thousand in 2023, then rose sharply to US$1,450,290 thousand in 2024, before declining to US$433,695 thousand in 2025. This suggests considerable variability in non-cash items impacting the balance sheet.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio shows significant year-over-year changes. It started at 26.65% in 2022, decreased substantially to 11.17% in 2023, then increased dramatically to 39.84% in 2024, and finally decreased to 9.47% in 2025. The large increase in 2024, followed by a decrease in 2025, is particularly noteworthy. A ratio above 10% may suggest potential earnings manipulation, and the fluctuations observed here could indicate aggressive accounting practices or changes in the company’s operational cycle. The 2024 peak warrants further scrutiny to determine the underlying drivers of the increased accruals relative to operating assets.
In summary, while net operating assets show steady growth, the balance-sheet-based accruals ratio demonstrates considerable volatility. The substantial increase in the accruals ratio in 2024, and its subsequent decline in 2025, require further investigation to assess the quality of earnings and the sustainability of the reported financial performance.
Cash-Flow-Statement-Based Accruals Ratio
Cadence Design Systems Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net income | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash used for investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Accenture PLC | ||||||
| Adobe Inc. | ||||||
| AppLovin Corp. | ||||||
| CrowdStrike Holdings Inc. | ||||||
| Datadog Inc. | ||||||
| International Business Machines Corp. | ||||||
| Intuit Inc. | ||||||
| Microsoft Corp. | ||||||
| Oracle Corp. | ||||||
| Palantir Technologies Inc. | ||||||
| Palo Alto Networks Inc. | ||||||
| Salesforce Inc. | ||||||
| ServiceNow Inc. | ||||||
| Synopsys Inc. | ||||||
| Workday Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Software & Services | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | ||||||
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 × ÷ [( + ) ÷ 2] =
2 Click competitor name to see calculations.
The information presents a review of net operating assets, cash-flow-statement-based aggregate accruals, and the resulting accruals ratio over a four-year period. Net operating assets demonstrate a consistent upward trend throughout the period, increasing from US$2.61 billion in 2022 to US$4.80 billion in 2025. However, cash-flow-statement-based aggregate accruals exhibit significant volatility. The accruals ratio, calculated from these figures, mirrors this volatility, fluctuating considerably year-over-year.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio began at 15.03% in 2022, representing a substantial level of accruals relative to net operating assets. A significant decrease was observed in 2023, with the ratio falling to 3.78%. This suggests a reduction in the reliance on accruals to report earnings. The ratio then increased substantially in 2024, reaching 17.36%, indicating a return to a higher level of accrual-based earnings reporting. Notably, 2025 shows a negative accruals ratio of -3.48%. This negative value suggests that cash flows exceeded reported earnings, or that significant cash was generated from the reduction of accruals.
The substantial fluctuations in the accruals ratio warrant further investigation. The increase from 3.78% in 2023 to 17.36% in 2024 could indicate aggressive revenue recognition or delayed expense recognition. Conversely, the negative ratio in 2025 could be due to a deliberate effort to improve the quality of earnings by reducing accruals, or it could be a result of unusual cash flow events. The volatility in aggregate accruals, coupled with the shift to a negative accruals ratio in the final year, suggests a potential need to examine the underlying components of accruals more closely to understand the drivers of these changes and assess the sustainability of reported earnings.
The consistent growth in net operating assets, while positive, should be considered in conjunction with the fluctuating accruals ratio. A stable and predictable accruals ratio is generally preferred, as it indicates a more consistent relationship between reported earnings and underlying cash flows. The observed pattern suggests a potential area for increased scrutiny regarding earnings quality.