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
Cash-Flow-Statement-Based Accruals Ratio

Cintas Corp., balance sheet computation of aggregate accruals

US$ in thousands

	May 31, 2024	May 31, 2023	May 31, 2022	May 31, 2021	May 31, 2020	May 31, 2019
Operating Assets
Total assets	9,168,817)	8,546,356)	8,147,256)	8,236,823)	7,669,885)	7,436,662)
Less: Cash and cash equivalents	342,015)	124,149)	90,471)	493,640)	145,402)	96,645)
Operating assets	8,826,802)	8,422,207)	8,056,785)	7,743,183)	7,524,483)	7,340,017)
Operating Liabilities
Total liabilities	4,852,445)	4,682,370)	4,839,060)	4,548,976)	4,434,683)	4,433,941)
Less: Debt due within one year	449,595)	—)	311,574)	899,070)	—)	312,264)
Less: Debt due after one year	2,025,934)	2,486,405)	2,483,932)	1,642,833)	2,539,705)	2,537,507)
Operating liabilities	2,376,916)	2,195,965)	2,043,554)	2,007,073)	1,894,978)	1,584,170)

Net operating assets¹	6,449,886)	6,226,242)	6,013,231)	5,736,110)	5,629,505)	5,755,847)
Balance-sheet-based aggregate accruals²	223,644)	213,011)	277,121)	106,605)	(126,342)	—)
Financial Ratio
Balance-sheet-based accruals ratio³	3.53%	3.48%	4.72%	1.88%	-2.22%	—
Benchmarks
Balance-Sheet-Based Accruals Ratio, Industry
Industrials	4.97%	-1.04%	0.29%	3.43%	200.00%	—

Based on: 10-K (reporting date: 2024-05-31), 10-K (reporting date: 2023-05-31), 10-K (reporting date: 2022-05-31), 10-K (reporting date: 2021-05-31), 10-K (reporting date: 2020-05-31), 10-K (reporting date: 2019-05-31).

¹ 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 8,826,802 – 2,376,916 = 6,449,886

² 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets₂₀₂₄ – Net operating assets₂₀₂₃
= 6,449,886 – 6,226,242 = 223,644

³ 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 223,644 ÷ [(6,449,886 + 6,226,242) ÷ 2] = 3.53%

The analysis of financial reporting quality measures over the five-year period reveals notable trends in net operating assets and accruals.

Net Operating Assets: There is a consistent upward trend in net operating assets from 5,629,505 thousand US dollars in 2020 to 6,449,886 thousand US dollars in 2024. This represents steady growth each year, indicating an increasing scale of operating investment or asset base over time.
Balance-sheet-based Aggregate Accruals: Aggregate accruals exhibit significant variability with a negative value in 2020 (-126,342 thousand US dollars) shifting to positive values thereafter. The accruals increased substantially in 2022 to 277,121 thousand dollars, followed by a slight decrease in 2023 to 213,011 thousand dollars, and rose again in 2024 to 223,644 thousand dollars. This pattern suggests changes in accounting estimates or timing differences in recognizing expenses and revenues, with generally higher accrual levels in the more recent years compared to 2020.
Balance-sheet-based Accruals Ratio: The accruals ratio mirrors the aggregate accruals trend, moving from a negative -2.22% in 2020 to positive values thereafter. The ratio peaked in 2022 at 4.72%, indicating a higher proportion of accruals relative to net operating assets, followed by a decline to 3.48% in 2023 and a slight increase to 3.53% in 2024. The positive ratios from 2021 onward suggest a shift toward higher accrual-based components in the reported earnings, but the reduction after 2022 hints at some moderation in accrual intensity.

Overall, the data demonstrate an expanding asset base with an upward adjustment in accrual amounts and ratios starting in 2021. The initial negative accruals in 2020 may indicate a conservative reporting stance or timing effects, followed by increased accrual activity. The fluctuations in accrual ratios suggest some variability in the underlying earnings quality, with potential implications for earnings management or economic performance recognition patterns.

Cintas Corp., cash flow statement computation of aggregate accruals

US$ in thousands

	May 31, 2024	May 31, 2023	May 31, 2022	May 31, 2021	May 31, 2020	May 31, 2019
Net income	1,571,592)	1,348,010)	1,235,757)	1,110,968)	876,037)	884,981)
Less: Net cash provided by operating activities	2,079,781)	1,597,814)	1,537,625)	1,360,740)	1,291,483)	1,067,862)
Less: Net cash used in investing activities	(608,631)	(388,672)	(402,635)	(137,215)	(285,398)	(235,638)
Cash-flow-statement-based aggregate accruals	100,442)	138,868)	100,767)	(112,557)	(130,048)	52,757)
Financial Ratio
Cash-flow-statement-based accruals ratio¹	1.58%	2.27%	1.72%	-1.98%	-2.28%	—
Benchmarks
Cash-Flow-Statement-Based Accruals Ratio, Industry
Industrials	5.29%	1.67%	-2.31%	-8.91%	-5.18%	—

Based on: 10-K (reporting date: 2024-05-31), 10-K (reporting date: 2023-05-31), 10-K (reporting date: 2022-05-31), 10-K (reporting date: 2021-05-31), 10-K (reporting date: 2020-05-31), 10-K (reporting date: 2019-05-31).

¹ 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 100,442 ÷ [(6,449,886 + 6,226,242) ÷ 2] = 1.58%

Net Operating Assets: The net operating assets exhibit a consistent upward trend over the five-year period. Starting at approximately $5.63 billion in 2020, the figure gradually increased each year, reaching nearly $6.45 billion by 2024. This steady growth suggests a sustained expansion in operating asset investment or a strategic increase in operational scale.
Cash-flow-statement-based Aggregate Accruals: The aggregate accruals show notable fluctuations throughout the observed period. Initially, the accruals were negative in 2020 and 2021, with amounts of roughly -$130 million and -$113 million, respectively. Beginning in 2022, however, the trend reversed, with positive accruals reported each year, peaking at approximately $139 million in 2023 before a slight decrease to about $100 million in 2024. This shift from negative to positive aggregate accruals may indicate a change in earnings quality or adjustments in accounting estimates.
Cash-flow-statement-based Accruals Ratio: The accruals ratio mirrors the changes seen in aggregate accruals. Initially negative at -2.28% and -1.98% for 2020 and 2021, the ratio transitions to positive values starting in 2022, reaching a high of 2.27% in 2023, before tapering slightly to 1.58% in 2024. The movement from negative to positive ratios signifies a shift from cash-based to accrual-based earnings recognition, which could impact the interpretation of earnings sustainability and quality.

Cintas Corp. (NASDAQ:CTAS)

Financial Reporting Quality: Aggregate Accruals

Balance-Sheet-Based Accruals Ratio

Cash-Flow-Statement-Based Accruals Ratio