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
Datadog 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 | 5,785,339) | 3,936,072) | 3,004,852) | 2,380,794) | 1,890,285) | |
| Less: Cash and cash equivalents | 1,246,983) | 330,339) | 338,985) | 270,973) | 224,927) | |
| Less: Marketable securities | 2,942,076) | 2,252,559) | 1,545,341) | 1,283,473) | 1,292,532) | |
| Operating assets | 1,596,280) | 1,353,174) | 1,120,526) | 826,348) | 372,826) | |
| Operating Liabilities | ||||||
| Total liabilities | 3,070,976) | 1,910,718) | 1,594,347) | 1,339,591) | 932,853) | |
| Less: Convertible senior notes, net, current | 634,023) | —) | —) | —) | —) | |
| Less: Convertible senior notes, net, non-current | 979,282) | 742,235) | 738,847) | 735,482) | 575,864) | |
| Operating liabilities | 1,457,671) | 1,168,483) | 855,500) | 604,109) | 356,989) | |
| Net operating assets1 | 138,609) | 184,691) | 265,026) | 222,239) | 15,837) | |
| Balance-sheet-based aggregate accruals2 | (46,082) | (80,335) | 42,787) | 206,402) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -28.51% | -35.73% | 17.56% | 173.39% | — | |
| 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% | |
| Cadence Design Systems Inc. | 39.84% | 11.17% | 26.65% | 4.43% | — | |
| 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% | — | |
| 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% | — | |
| 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 | 26.34% | 18.45% | 29.41% | 16.74% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 21.41% | 8.97% | 18.09% | 19.19% | — | |
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
= 1,596,280 – 1,457,671 = 138,609
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 138,609 – 184,691 = -46,082
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -46,082 ÷ [(138,609 + 184,691) ÷ 2] = -28.51%
4 Click competitor name to see calculations.
The data indicates significant fluctuations in net operating assets over the analyzed periods, with a peak in 2022 followed by a consistent decline through to 2024. Specifically, net operating assets increased from approximately 222 million US dollars at the end of 2021 to around 265 million in 2022, then decreased substantially to about 185 million in 2023 and further dropped to approximately 139 million in 2024.
Balance-sheet-based aggregate accruals exhibit a notable volatility pattern. Starting with a high value of roughly 206 million US dollars at the end of 2021, these accruals sharply declined to about 43 million in 2022. Subsequently, aggregate accruals turned negative in 2023, reaching approximately -80 million, and remained negative, though less so, near -46 million in 2024.
The balance-sheet-based accruals ratio, expressed as a percentage, shows a correspondingly dramatic change. It begins with an exceptionally high positive ratio of 173.39% in 2021, which sharply decreases to 17.56% in 2022. The ratio then reverses into negative territory in 2023 and 2024 with values of -35.73% and -28.51%, respectively. This shift from a very high positive ratio to negative percentages suggests a substantial change in the nature of accruals relative to net operating assets, reflecting potential changes in earnings quality or accounting practices.
Overall, the trends observed indicate a reduction in net operating assets alongside a move from high positive to negative accruals, possibly implying a deterioration in the quality or composition of the earnings base within the period under review. The marked fluctuations in accruals and their ratio highlight the need for further investigation into underlying operational or accounting factors contributing to these changes.
Cash-Flow-Statement-Based Accruals Ratio
Datadog 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 (loss) | 183,746) | 48,568) | (50,160) | (20,745) | (24,547) | |
| Less: Net cash provided by operating activities | 870,603) | 659,954) | 418,407) | 286,545) | 109,091) | |
| Less: Net cash used in investing activities | (736,840) | (731,365) | (384,670) | (273,740) | (1,152,624) | |
| Cash-flow-statement-based aggregate accruals | 49,983) | 119,979) | (83,897) | (33,550) | 1,018,986) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 30.92% | 53.36% | -34.44% | -28.18% | — | |
| 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% | |
| Cadence Design Systems Inc. | 17.36% | 3.78% | 15.03% | -5.75% | — | |
| 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% | — | |
| 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% | — | |
| 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% | 7.40% | 1.94% | 11.13% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 6.30% | 1.47% | 2.90% | 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 × 49,983 ÷ [(138,609 + 184,691) ÷ 2] = 30.92%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets decreased consistently over the observed periods. Starting at 222,239 thousand US dollars at the end of 2021, the value increased to 265,026 thousand US dollars in 2022. However, a significant decline followed, dropping to 184,691 thousand US dollars in 2023 and further down to 138,609 thousand US dollars in 2024. This trajectory indicates a shrinking asset base related to operations after an initial increase.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals showed notable volatility. Initially, negative accruals were observed, with -33,550 thousand US dollars in 2021 and a deeper negative of -83,897 thousand US dollars in 2022. In 2023, there was an abrupt reversal with positive accruals of 119,979 thousand US dollars, followed by a reduction in positive accruals to 49,983 thousand US dollars in 2024. This shift from negative to significantly positive accruals suggests changes in the timing or recognition of expenses and revenues affecting accrual accounting.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrored the trend in aggregate accruals with negative percentages in the first two years (-28.18% in 2021 and a steeper -34.44% in 2022), indicating that accruals reduced cash flow relative to net operating assets during this period. In 2023, the ratio turned positive, rising sharply to 53.36%, and then decreased to 30.92% in 2024, yet remaining positive. This substantial shift implies a material change in the quality or composition of earnings, with accruals contributing positively rather than negatively to cash flow in recent years.