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% | 27.93% | — | — | — | |
| Adobe Inc. | -8.24% | 14.14% | — | — | — | |
| AppLovin Corp. | 36.28% | — | — | — | — | |
| Cadence Design Systems Inc. | 26.65% | — | — | — | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Datadog Inc. | 17.56% | — | — | — | — | |
| International Business Machines Corp. | 1.55% | — | — | — | — | |
| Intuit Inc. | 85.68% | 139.73% | — | — | — | |
| Microsoft Corp. | 42.27% | 40.52% | — | — | — | |
| Oracle Corp. | 9.90% | 5.62% | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | -124.73% | 85.21% | — | — | — | |
| 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 | 29.59% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 18.16% | 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.
- Net operating assets
- The net operating assets exhibit considerable volatility over the observed periods. Starting at -$743.7 million in 2019, the figure decreased to -$981.3 million in 2020, indicating a growing negative net asset position. In 2021, there was an improvement to -$764.9 million; however, in 2022, net operating assets sharply declined again to -$1.502 billion, representing the largest negative balance within the timeframe.
- Balance-sheet-based aggregate accruals
- Aggregate accruals show a highly variable pattern. The accruals were negative at -$104.3 million in 2019, deepened to -$237.6 million in 2020, and then shifted dramatically to positive $216.4 million in 2021. This was followed by a sharp reversal to a much larger negative amount of -$737.3 million in 2022. This swing from negative to positive and back to a substantially larger negative value suggests significant fluctuations in recognized earnings that are not cash-based.
- Balance-sheet-based accruals ratio
- No data is available to analyze this ratio. The missing values limit insights into the proportional relationship of accruals relative to net operating assets.
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Cash-Flow-Statement-Based Accruals Ratio
Fortinet Inc., cash flow statement computation of aggregate accruals
US$ 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% | 11.80% | — | — | — | |
| Adobe Inc. | -19.93% | 9.21% | — | — | — | |
| AppLovin Corp. | 22.07% | — | — | — | — | |
| Cadence Design Systems Inc. | 15.03% | — | — | — | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | |
| Datadog Inc. | -34.44% | — | — | — | — | |
| International Business Machines Corp. | -7.22% | — | — | — | — | |
| Intuit Inc. | 25.60% | 58.72% | — | — | — | |
| Microsoft Corp. | 13.42% | 17.68% | — | — | — | |
| Oracle Corp. | -30.58% | 25.81% | — | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | |
| Palo Alto Networks Inc. | -196.64% | -68.30% | — | — | — | |
| 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 | 2.21% | 21.19% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 2.99% | 15.85% | — | — | — | |
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.
The financial data over the four-year period reveals significant fluctuations in the net operating assets and the cash-flow-statement-based aggregate accruals, which can provide insights into the company’s operational efficiency and financial reporting quality.
- Net Operating Assets
- The net operating assets were negative throughout the observed period, indicating that liabilities exceeded operating assets in each year. Initially, there was a deterioration from -743,700 thousand USD at the end of 2019 to -981,300 thousand USD in 2020. This negative trend moderated somewhat in 2021 to -764,900 thousand USD but then substantially worsened by the end of 2022, reaching -1,502,200 thousand USD. The increasing absolute value of negative net operating assets towards the end of the period may signal growing operational or financial challenges, possibly related to financing structure or asset utilization.
- Cash-Flow-Statement-Based Aggregate Accruals
- This measure exhibits considerable volatility over the period. The accruals were positive at 20,800 thousand USD in 2019, sharply turned negative to -522,400 thousand USD in 2020, rebounded to a positive figure of 432,200 thousand USD in 2021, and then plunged further to a considerably negative -1,637,200 thousand USD in 2022. These large swings suggest inconsistent accrual accounting effects on cash flows, which could reflect changing accounting policies, timing differences between income recognition and cash receipts/payments, or operational shifts affecting earnings quality.
- Cash-Flow-Statement-Based Accruals Ratio
- No data was provided for this ratio across all the years, preventing analysis of this particular measure. The accruals ratio would typically provide insight into the proportion of accruals relative to cash flows, offering additional perspective on earnings quality and the potential presence of earnings management.
In summary, the negative and increasingly volatile net operating assets, combined with the significant fluctuations in aggregate accruals, point towards a period characterized by instability in the operational asset base and notable variability in accrual-based earnings components. This could suggest heightened risks related to the quality and sustainability of earnings, necessitating further investigation into the underlying business and accounting factors driving these changes.
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