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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- Balance Sheet: Assets
- Common-Size Balance Sheet: Assets
- Analysis of Profitability Ratios
- Enterprise Value to EBITDA (EV/EBITDA)
- Enterprise Value to FCFF (EV/FCFF)
- Capital Asset Pricing Model (CAPM)
- Dividend Discount Model (DDM)
- Current Ratio since 2019
- Price to Book Value (P/BV) since 2019
- Analysis of Revenues
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Balance-Sheet-Based Accruals Ratio
Datadog 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: Marketable securities | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Convertible senior notes, net, current | ||||||
| Less: Convertible senior notes, net, non-current | ||||||
| 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. | ||||||
| Cadence Design Systems Inc. | ||||||
| CrowdStrike Holdings 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 balance-sheet-based accruals ratio exhibits significant fluctuations over the observed period. Net operating assets demonstrate a decreasing trend from 2022 to 2024, followed by an increase in 2025. Aggregate accruals show a marked shift from positive values in 2022 to negative values in 2023 and 2024, before becoming positive again in 2025.
- Net Operating Assets
- Net operating assets decreased from US$265.026 million in 2022 to US$138.609 million in 2024, representing a substantial decline. However, a recovery is evident in 2025, with net operating assets increasing to US$240.819 million.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals were positive at US$42.787 million in 2022. This was followed by negative accruals of US$-80.335 million in 2023 and US$-46.082 million in 2024. Accruals turned positive again in 2025, reaching US$102.210 million. The magnitude of the negative accruals in 2023 and 2024 is considerably larger than the positive accrual in 2022 and 2025.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio was 17.56% in 2022. A significant decrease is observed in 2023, with the ratio falling to -35.73%. This negative trend continued in 2024, with the ratio reaching -28.51%. The ratio experienced a substantial positive swing in 2025, increasing to 53.88%. The volatility in this ratio suggests considerable changes in the relationship between net operating assets and aggregate accruals.
The shift from positive to negative accruals, and the corresponding fluctuations in the accruals ratio, warrant further investigation. The large positive accruals ratio in 2025, following two years of negative values, could indicate a change in accounting practices, revenue recognition policies, or underlying business operations. The initial decline in net operating assets, coupled with negative accruals, may suggest potential concerns regarding earnings quality, although a comprehensive assessment would require additional financial information and context.
Cash-Flow-Statement-Based Accruals Ratio
Datadog Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net income (loss) | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash used in 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. | ||||||
| Cadence Design Systems Inc. | ||||||
| CrowdStrike Holdings 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 analysis reveals a significant fluctuation in cash-flow-statement-based aggregate accruals and the corresponding accruals ratio over the four-year period. Net operating assets demonstrate a decreasing trend initially, followed by an increase in the final year.
- Net Operating Assets
- Net operating assets decreased from US$265,026 thousand in 2022 to US$138,609 thousand in 2024, representing a substantial decline. However, a notable recovery occurred in 2025, with net operating assets rising to US$240,819 thousand. This suggests potential shifts in operational investment or asset management strategies.
- Cash-Flow-Statement-Based Aggregate Accruals
- Cash-flow-statement-based aggregate accruals exhibited a dramatic shift from a negative value of US$-83,897 thousand in 2022 to a positive value of US$119,979 thousand in 2023. This indicates a reversal in the relationship between reported earnings and cash flows. Accruals continued to be positive, though decreasing to US$49,983 thousand in 2024, before experiencing a substantial increase to US$392,086 thousand in 2025. The magnitude of accruals in 2025 is considerably higher than in previous years.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrored the trend in aggregate accruals. It began at -34.44% in 2022, shifted to 53.36% in 2023, decreased to 30.92% in 2024, and then surged to 206.67% in 2025. The substantial increase in the accruals ratio in 2025 warrants further investigation, as a ratio exceeding 100% may suggest aggressive accounting practices or a significant disconnect between earnings and cash flow. The negative ratio in 2022 indicates that cash flows exceeded reported earnings, while the positive ratios in subsequent years suggest the opposite.
The observed patterns suggest a changing dynamic between cash flows and reported earnings. The significant increase in both aggregate accruals and the accruals ratio in 2025 is a key area for further scrutiny to assess the quality of earnings and potential accounting risks.