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
Fortinet Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 6,228,000) | 5,919,100) | 4,044,500) | 3,885,500) | 3,078,000) | |
| Less: Cash and cash equivalents | 1,682,900) | 1,319,100) | 1,061,800) | 1,222,500) | 1,112,400) | |
| Less: Short-term investments | 502,600) | 1,194,000) | 775,500) | 843,100) | 537,200) | |
| Less: Marketable equity securities | 25,500) | 38,600) | —) | —) | —) | |
| Operating assets | 4,017,000) | 3,367,400) | 2,207,200) | 1,819,900) | 1,428,400) | |
| Operating Liabilities | ||||||
| Total liabilities | 6,509,600) | 5,120,700) | 3,188,500) | 2,563,600) | 2,067,800) | |
| Less: Long-term debt | 990,400) | 988,400) | —) | —) | —) | |
| Operating liabilities | 5,519,200) | 4,132,300) | 3,188,500) | 2,563,600) | 2,067,800) | |
| Net operating assets1 | (1,502,200) | (764,900) | (981,300) | (743,700) | (639,400) | |
| Balance-sheet-based aggregate accruals2 | (737,300) | 216,400) | (237,600) | (104,300) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | — | — | — | — | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Accenture PLC | 21.70% | — | — | — | — | |
| Adobe Inc. | -8.24% | 14.14% | — | — | — | |
| AppLovin Corp. | 36.28% | — | — | — | — | |
| Cadence Design Systems Inc. | 26.65% | — | — | — | — | |
| Datadog Inc. | 17.56% | — | — | — | — | |
| International Business Machines Corp. | 1.55% | — | — | — | — | |
| Intuit Inc. | 85.68% | — | — | — | — | |
| Microsoft Corp. | 42.27% | — | — | — | — | |
| Oracle Corp. | 9.90% | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | -124.73% | — | — | — | — | |
| Salesforce Inc. | 57.74% | — | — | — | — | |
| ServiceNow Inc. | 12.89% | — | — | — | — | |
| Synopsys Inc. | 5.01% | 0.36% | — | — | — | |
| Workday Inc. | 55.93% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Software & Services | 29.53% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 19.09% | 200.00% | — | — | — | |
Based on: 10-K (reporting date: 2022-12-31), 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).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 4,017,000 – 5,519,200 = -1,502,200
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= -1,502,200 – -764,900 = -737,300
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -737,300 ÷ [(-1,502,200 + -764,900) ÷ 2] = —
4 Click competitor name to see calculations.
The analysis of the financial reporting quality for the period ending December 31, 2022, reveals a consistent pattern of negative net operating assets and significant volatility in balance-sheet-based aggregate accruals.
- Net Operating Assets Trend
- Net operating assets remained negative throughout the entire four-year period, indicating that operating liabilities consistently exceeded operating assets. While there was a slight recovery in 2021, the value declined sharply by December 31, 2022, reaching -1,502,200 thousand USD. This trajectory suggests a substantial expansion in the company's operating liability base relative to its operating assets.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals exhibited significant fluctuations. From 2019 to 2020, accruals became more negative, moving from -104,300 thousand USD to -237,600 thousand USD. A notable reversal occurred in 2021, where accruals shifted to a positive 216,400 thousand USD. However, this trend reversed aggressively in 2022, with accruals dropping to -737,300 thousand USD, the lowest level in the observed period.
- Earnings Quality Implications
- The prevalence of negative aggregate accruals in three of the four years suggests a reporting environment where cash flows from operations generally exceeded reported accrual-based earnings, which is typically associated with higher earnings quality. The spike into positive accruals in 2021 indicates a temporary period where reported earnings grew faster than the underlying cash flow. The sharp return to deeply negative accruals in 2022, coinciding with the expansion of negative net operating assets, reflects a significant increase in non-cash liabilities—such as deferred revenue—which typically enhances the quality of reported earnings by shifting cash collection ahead of revenue recognition.
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Cash-Flow-Statement-Based Accruals Ratio
Fortinet Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Fortinet, Inc. | 857,300) | 606,800) | 488,500) | 326,500) | 332,200) | |
| Less: Net cash provided by operating activities | 1,730,600) | 1,499,700) | 1,083,700) | 808,000) | 638,900) | |
| Less: Net cash (used in) provided by investing activities | 763,900) | (1,325,100) | (72,800) | (502,300) | (134,900) | |
| Cash-flow-statement-based aggregate accruals | (1,637,200) | 432,200) | (522,400) | 20,800) | (171,800) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | — | — | — | — | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Accenture PLC | 11.87% | — | — | — | — | |
| Adobe Inc. | -19.93% | 9.21% | — | — | — | |
| AppLovin Corp. | 22.07% | — | — | — | — | |
| Cadence Design Systems Inc. | 15.03% | — | — | — | — | |
| Datadog Inc. | -34.44% | — | — | — | — | |
| International Business Machines Corp. | -7.22% | — | — | — | — | |
| Intuit Inc. | 25.60% | — | — | — | — | |
| Microsoft Corp. | 13.42% | — | — | — | — | |
| Oracle Corp. | -30.58% | — | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | -196.64% | — | — | — | — | |
| Salesforce Inc. | 21.96% | — | — | — | — | |
| ServiceNow Inc. | 8.80% | — | — | — | — | |
| Synopsys Inc. | -4.64% | -4.88% | — | — | — | |
| Workday Inc. | -0.65% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Software & Services | 2.29% | 21.87% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 3.25% | 15.65% | — | — | — | |
Based on: 10-K (reporting date: 2022-12-31), 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).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,637,200 ÷ [(-1,502,200 + -764,900) ÷ 2] = —
2 Click competitor name to see calculations.
Net operating assets maintained a consistently negative balance throughout the observed period, indicating a financial structure where operating liabilities exceed operating assets. This position expanded from -743,700 thousand US dollars in 2019 to a peak negative value of -1,502,200 thousand US dollars by December 31, 2022. While there was a temporary contraction in this negative balance in 2021, the overall trend demonstrates a significant increase in the scale of negative net operating assets over the four-year window.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals exhibited extreme fluctuations. The figures transitioned from a marginal positive of 20,800 thousand US dollars in 2019 to a sharp negative of -522,400 thousand US dollars in 2020. This was followed by a reversal to positive 432,200 thousand US dollars in 2021, before concluding with a substantial negative value of -1,637,200 thousand US dollars in 2022. This pattern suggests significant periodic divergence between accrual-based accounting earnings and actual cash flow generation.
- Accruals Ratio Dynamics
- The relationship between aggregate accruals and net operating assets indicates a growing instability in reporting quality metrics. The magnitude of the accruals ratio increased substantially each year, moving from a near-zero baseline in 2019 to an extreme variance in 2022. By the end of the period, the absolute value of aggregate accruals exceeded the absolute value of net operating assets, signifying that the gap between cash flows and net income has become the dominant driver of the ratio relative to the size of the operating asset base.
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