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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Diamondback Energy Inc. pages available for free this week:
- Common-Size Balance Sheet: Assets
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Common Stock Valuation Ratios
- Enterprise Value (EV)
- Capital Asset Pricing Model (CAPM)
- Dividend Discount Model (DDM)
- Selected Financial Data since 2012
- Operating Profit Margin since 2012
- Total Asset Turnover since 2012
- Price to Sales (P/S) since 2012
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Balance-Sheet-Based Accruals Ratio
Diamondback Energy Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Restricted cash | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current maturities of long-term debt | ||||||
| Less: Long-term debt, excluding current maturities | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | ||||||
| ConocoPhillips | ||||||
| Exxon Mobil Corp. | ||||||
| Occidental Petroleum Corp. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Energy | ||||||
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= – =
3 2021 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 data reveals noticeable fluctuations in the financial reporting quality measures over the four-year period ending December 31, 2021. Net operating assets show a pattern of initial increase followed by a decline and then a recovery. Specifically, net operating assets rose from 18,416 million US dollars in 2018 to 20,149 million in 2019, decreased to 15,511 million in 2020, and subsequently increased again to 19,260 million in 2021.
Balance-sheet-based aggregate accruals exhibit considerable volatility. In 2018, the accruals were significantly positive at 11,469 million US dollars, dropped sharply to 1,733 million in 2019, turned negative in 2020 with -4,638 million, and then reverted to a positive value of 3,749 million in 2021. This fluctuation suggests variability in the company's earnings adjustments relative to cash flows over these years.
The balance-sheet-based accruals ratio, which standardizes the aggregate accruals relative to net operating assets, mirrors the volatility seen in the aggregate accruals. Starting at a very high ratio of 90.44% in 2018, it declined steeply to 8.99% in 2019, then moved into negative territory at -26.01% in 2020, and returned to a positive 21.56% in 2021. This pattern indicates a significant change in the company's accrual accounting practices or earnings quality, particularly in 2020 where the negative ratio might reflect an unusual or non-recurring event affecting accruals that year.
Overall, the trends suggest that the quality and characteristics of earnings as captured by accruals have experienced considerable instability during the period, with 2020 standing out as a year with notably different financial reporting dynamics compared to the other years. Such variations may warrant closer examination of the underlying economic events or accounting policies affecting accrual calculations during these periods.
Cash-Flow-Statement-Based Accruals Ratio
Diamondback Energy Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to Diamondback Energy, Inc. | ||||||
| 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 | ||||||
| Chevron Corp. | ||||||
| ConocoPhillips | ||||||
| Exxon Mobil Corp. | ||||||
| Occidental Petroleum Corp. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Energy | ||||||
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 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 data reflects the annual financial reporting quality measures related to net operating assets and accruals for the period ending December 31 from 2018 to 2021.
- Net Operating Assets
- There is a fluctuating trend in net operating assets over the four-year period. The value increased from 18,416 million US dollars in 2018 to a peak of 20,149 million US dollars in 2019. However, this was followed by a notable decline to 15,511 million US dollars in 2020, before rising again to 19,260 million US dollars in 2021. The pattern suggests volatility in asset levels with a significant dip during 2020, possibly related to operational or market conditions in that year.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals exhibit considerable variability as well. Beginning at 2,784 million US dollars in 2018, the figure almost halved to 1,394 million US dollars in 2019. A marked reversal occurred in 2020 where accruals became negative, amounting to -4,534 million US dollars, indicating a substantial change in the composition of operating cash flows versus earnings. In 2021, accruals moved closer to zero at -223 million US dollars, suggesting a normalization or reduction in accrual adjustments compared to the previous year.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, representing accruals as a percentage of net operating assets, mirrors the pattern seen in aggregate accruals. It decreased sharply from 21.96% in 2018 to 7.23% in 2019, indicating a reduction in accrual-based earnings relative to assets. The ratio turned negative in 2020 at -25.43%, reflecting the large negative accruals and suggesting a potential deterioration in earnings quality for that year. By 2021, the ratio improved to -1.28%, although the negative sign denotes that accruals still reduced reported earnings, but to a lesser extent than in 2020.
In summary, the data reveals volatility in net operating assets alongside significant fluctuations in accrual measures. The substantial negative accruals and corresponding negative accrual ratio in 2020 indicate a departure from normal earnings quality, with partial recovery observed in 2021. These patterns warrant attention as they may impact the assessment of financial reporting quality and underlying operational performance.