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
Cadence Design Systems Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 8,974,482) | 5,669,491) | 5,137,071) | 4,386,299) | 3,950,785) | |
| Less: Cash and cash equivalents | 2,644,030) | 1,008,152) | 882,325) | 1,088,940) | 928,432) | |
| Less: Short-term investments | 140,625) | 130,359) | 4,490) | 5,956) | 4,452) | |
| Operating assets | 6,189,827) | 4,530,980) | 4,250,256) | 3,291,403) | 3,017,901) | |
| Operating Liabilities | ||||||
| Total liabilities | 4,300,904) | 2,265,220) | 2,391,958) | 1,645,624) | 1,457,767) | |
| Less: Revolving credit facility | —) | —) | 100,000) | —) | —) | |
| Less: Current portion of long-term debt | —) | 349,285) | —) | —) | —) | |
| Less: Long-term debt, excluding current portion | 2,476,183) | 299,771) | 648,078) | 347,588) | 346,793) | |
| Operating liabilities | 1,824,721) | 1,616,164) | 1,643,880) | 1,298,036) | 1,110,974) | |
| Net operating assets1 | 4,365,106) | 2,914,816) | 2,606,376) | 1,993,367) | 1,906,927) | |
| Balance-sheet-based aggregate accruals2 | 1,450,290) | 308,440) | 613,009) | 86,440) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 39.84% | 11.17% | 26.65% | 4.43% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Accenture PLC | 35.69% | 16.32% | 21.70% | 27.93% | 3.73% | |
| Adobe Inc. | -3.83% | 1.85% | -8.24% | 14.14% | 8.20% | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Fair Isaac Corp. | 6.46% | 12.11% | -3.66% | -6.17% | -0.02% | |
| International Business Machines Corp. | 2.79% | 2.42% | 1.55% | -7.39% | — | |
| Intuit Inc. | 3.35% | -1.74% | 85.68% | 139.73% | -1.39% | |
| Microsoft Corp. | 52.18% | 22.96% | 42.27% | 40.52% | 14.41% | |
| Oracle Corp. | 4.30% | 51.77% | 9.90% | 5.62% | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | 89.91% | 137.01% | -124.73% | 85.21% | 69.06% | |
| Salesforce Inc. | -2.46% | -2.30% | 57.74% | 10.87% | — | |
| ServiceNow Inc. | 22.91% | 61.79% | 12.89% | 34.89% | — | |
| Synopsys Inc. | 7.85% | 13.85% | 5.01% | 0.36% | 8.40% | |
| Workday Inc. | 28.44% | -11.24% | 55.93% | -15.99% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Software & Services | 26.35% | 18.48% | 29.42% | 16.66% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 21.42% | 8.98% | 18.09% | 19.16% | — | |
Based on: 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), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 6,189,827 – 1,824,721 = 4,365,106
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 4,365,106 – 2,914,816 = 1,450,290
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,450,290 ÷ [(4,365,106 + 2,914,816) ÷ 2] = 39.84%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets show a consistent upward trend over the observed period. Starting from approximately 1.99 billion US dollars at the end of 2021, the figure increased to about 2.61 billion by the end of 2022. This growth continued in 2023, reaching approximately 2.91 billion, and then accelerated significantly in 2024, culminating at roughly 4.37 billion. This indicates a substantial increase in the company's investment in operating assets over the four-year span.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals have fluctuated considerably during the reported years. Beginning at 86.4 million in 2021, accruals surged sharply to 613 million in 2022. In 2023, the amount decreased to 308 million, before rising again substantially in 2024 to 1.45 billion. This volatility suggests notable variations in the recognition of earnings adjustments related to the balance sheet components.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio presents a similar pattern of volatility. Initially, the ratio stood at a moderate 4.43% in 2021, then experienced a pronounced increase to 26.65% in 2022. Following this spike, the ratio declined to 11.17% in 2023, only to increase sharply again to 39.84% in 2024. The high ratio in 2024 represents a significant portion of accruals relative to net operating assets, suggesting increased reliance on accrual accounting measures in that year.
Cash-Flow-Statement-Based Accruals Ratio
Cadence Design Systems Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net income | 1,055,484) | 1,041,144) | 848,952) | 695,955) | 590,644) | |
| Less: Net cash provided by operating activities | 1,260,551) | 1,349,176) | 1,241,894) | 1,100,958) | 904,922) | |
| Less: Net cash used for investing activities | (837,118) | (412,249) | (738,634) | (292,954) | (292,158) | |
| Cash-flow-statement-based aggregate accruals | 632,051) | 104,217) | 345,692) | (112,049) | (22,120) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 17.36% | 3.78% | 15.03% | -5.75% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Accenture PLC | 24.31% | -0.19% | 11.87% | 11.80% | -13.65% | |
| Adobe Inc. | -21.90% | -21.73% | -19.93% | 9.21% | -0.48% | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Fair Isaac Corp. | -8.60% | -2.41% | -13.92% | -17.25% | -10.25% | |
| International Business Machines Corp. | -3.73% | 0.99% | -7.22% | -1.64% | — | |
| Intuit Inc. | -8.44% | -8.74% | 25.60% | 58.72% | -34.22% | |
| Microsoft Corp. | 30.89% | 5.22% | 13.42% | 17.68% | -8.19% | |
| Oracle Corp. | -1.01% | 42.79% | -30.58% | 25.81% | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | 33.84% | -37.95% | -196.64% | -68.30% | -488.47% | |
| Salesforce Inc. | -8.44% | -8.49% | 21.96% | 10.57% | — | |
| ServiceNow Inc. | -7.12% | 15.44% | 8.80% | -21.14% | — | |
| Synopsys Inc. | -7.64% | 0.20% | -4.64% | -4.88% | 0.92% | |
| Workday Inc. | 34.56% | 18.64% | -0.65% | -18.51% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Software & Services | 12.10% | 7.37% | 1.97% | 11.15% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 6.29% | 1.46% | 2.91% | 8.62% | — | |
Based on: 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), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 632,051 ÷ [(4,365,106 + 2,914,816) ÷ 2] = 17.36%
2 Click competitor name to see calculations.
- Net operating assets
- The net operating assets demonstrate a consistent upward trend across the observed periods. The value increased from approximately $1.99 billion at the end of 2021 to about $2.61 billion in 2022, followed by further rises to roughly $2.91 billion in 2023 and a significant surge to around $4.37 billion by the end of 2024. This steady growth indicates an expansion in the company's operational asset base over the four years.
- Cash-flow-statement-based aggregate accruals
- The aggregate accruals exhibited considerable volatility throughout the periods. Initially, there was a negative accrual value of approximately -$112 million in 2021, which shifted dramatically to a positive value of about $346 million in 2022. This positive trend continued with a moderation in 2023 to around $104 million, followed by a sharp increase to approximately $632 million in 2024. This pattern suggests fluctuations in accruals impacting cash flow quality, with notable growth in accrual values especially in the latest period.
- Cash-flow-statement-based accruals ratio
- The accruals ratio, representing the proportion of accruals relative to cash flow, showed a fluctuating but overall increasing trend. Starting from a negative ratio of -5.75% in 2021, the ratio climbed to 15.03% in 2022, decreased to 3.78% in 2023, and subsequently rose again to 17.36% in 2024. These variations indicate changes in the relationship between accruals and cash flows, with a marked increase in the ratio in 2022 and 2024 suggesting potentially higher accruals relative to cash inflows during those years.