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
Microchip Technology Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Mar 31, 2022 | Mar 31, 2021 | Mar 31, 2020 | Mar 31, 2019 | Mar 31, 2018 | Mar 31, 2017 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 16,199,500) | 16,478,800) | 17,426,100) | 18,350,000) | 8,257,200) | 7,686,881) | |
| Less: Cash and cash equivalents | 317,400) | 280,000) | 401,000) | 428,600) | 901,300) | 908,684) | |
| Less: Short-term investments | 2,000) | 2,000) | 2,000) | 2,300) | 1,295,300) | 394,088) | |
| Operating assets | 15,880,100) | 16,196,800) | 17,023,100) | 17,919,100) | 6,060,600) | 6,384,109) | |
| Operating Liabilities | |||||||
| Total liabilities | 10,304,700) | 11,141,700) | 11,840,600) | 13,062,500) | 4,977,400) | 4,416,170) | |
| Less: Current portion of long-term debt | —) | 1,322,900) | 608,800) | 1,360,800) | 1,309,900) | 49,952) | |
| Less: Long-term debt excluding current maturities | 7,687,400) | 7,581,200) | 8,873,400) | 8,946,200) | 1,758,400) | 2,900,524) | |
| Operating liabilities | 2,617,300) | 2,237,600) | 2,358,400) | 2,755,500) | 1,909,100) | 1,465,694) | |
| Net operating assets1 | 13,262,800) | 13,959,200) | 14,664,700) | 15,163,600) | 4,151,500) | 4,918,415) | |
| Balance-sheet-based aggregate accruals2 | (696,400) | (705,500) | (498,900) | 11,012,100) | (766,915) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | -5.12% | -4.93% | -3.35% | 114.03% | -16.91% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Advanced Micro Devices Inc. | 169.75% | — | — | — | — | — | |
| Analog Devices Inc. | -2.94% | 90.70% | — | — | — | — | |
| Applied Materials Inc. | 20.73% | 17.33% | — | — | — | — | |
| Broadcom Inc. | -5.37% | -8.72% | — | — | — | — | |
| Intel Corp. | 10.73% | — | — | — | — | — | |
| KLA Corp. | 21.25% | — | — | — | — | — | |
| Lam Research Corp. | 16.02% | — | — | — | — | — | |
| Marvell Technology Inc. | 75.44% | — | — | — | — | — | |
| Micron Technology Inc. | 12.07% | 11.51% | — | — | — | — | |
| NVIDIA Corp. | 28.31% | — | — | — | — | — | |
| Qualcomm Inc. | 68.49% | 22.56% | — | — | — | — | |
| Texas Instruments Inc. | 22.75% | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Semiconductors & Semiconductor Equipment | 26.65% | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Information Technology | 19.09% | 200.00% | — | — | — | — | |
Based on: 10-K (reporting date: 2022-03-31), 10-K (reporting date: 2021-03-31), 10-K (reporting date: 2020-03-31), 10-K (reporting date: 2019-03-31), 10-K (reporting date: 2018-03-31), 10-K (reporting date: 2017-03-31).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 15,880,100 – 2,617,300 = 13,262,800
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 13,262,800 – 13,959,200 = -696,400
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -696,400 ÷ [(13,262,800 + 13,959,200) ÷ 2] = -5.12%
4 Click competitor name to see calculations.
The analysis of balance-sheet-based accruals reveals a period of significant volatility centered around the 2019 fiscal year, followed by a phase of stabilization and a gradual contraction in operating assets.
- Net Operating Assets (NOA)
- A substantial increase in net operating assets occurred between March 31, 2018, and March 31, 2019, with values rising from 4,151,500 to 15,163,600 US$ in thousands. Following this peak, a consistent downward trend is observed over the subsequent three years, with NOA decreasing to 13,262,800 US$ in thousands by March 31, 2022.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals exhibited a sharp spike in 2019, reaching 11,012,100 US$ in thousands, which stands in stark contrast to the negative values recorded in all other analyzed periods. From 2020 through 2022, accruals returned to negative territory and remained relatively stable, fluctuating between -498,900 and -705,500 US$ in thousands.
- Balance-sheet-based Accruals Ratio
- The accruals ratio mirrored the volatility of the aggregate accruals, shifting from -16.91% in 2018 to an outlier peak of 114.03% in 2019. In the following three years, the ratio normalized, moving from -3.35% in 2020 to -5.12% in 2022. The return to and maintenance of negative ratios suggests a reporting environment where cash flows from operations exceed accrual-based earnings, a pattern typically indicative of higher earnings quality and lower financial reporting risk.
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Cash-Flow-Statement-Based Accruals Ratio
Microchip Technology Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Mar 31, 2022 | Mar 31, 2021 | Mar 31, 2020 | Mar 31, 2019 | Mar 31, 2018 | Mar 31, 2017 | ||
|---|---|---|---|---|---|---|---|
| Net income | 1,285,500) | 349,400) | 570,600) | 355,900) | 255,400) | 164,639) | |
| Less: Net cash provided by operating activities | 2,842,700) | 1,916,500) | 1,543,800) | 1,674,800) | 1,419,600) | 1,050,104) | |
| Less: Net cash used in investing activities | (477,700) | (173,300) | (133,200) | (6,811,000) | (1,011,700) | (2,837,973) | |
| Cash-flow-statement-based aggregate accruals | (1,079,500) | (1,393,800) | (840,000) | 5,492,100) | (152,500) | 1,952,508) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | -7.93% | -9.74% | -5.63% | 56.87% | -3.36% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Advanced Micro Devices Inc. | -15.28% | — | — | — | — | — | |
| Analog Devices Inc. | -2.54% | -11.85% | — | — | — | — | |
| Applied Materials Inc. | 18.18% | 14.75% | — | — | — | — | |
| Broadcom Inc. | -8.94% | -12.34% | — | — | — | — | |
| Intel Corp. | 2.75% | — | — | — | — | — | |
| KLA Corp. | 18.30% | — | — | — | — | — | |
| Lam Research Corp. | 12.43% | — | — | — | — | — | |
| Marvell Technology Inc. | 17.57% | — | — | — | — | — | |
| Micron Technology Inc. | 11.37% | 10.01% | — | — | — | — | |
| NVIDIA Corp. | 73.13% | — | — | — | — | — | |
| Qualcomm Inc. | 46.91% | 15.61% | — | — | — | — | |
| Texas Instruments Inc. | 28.24% | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Semiconductors & Semiconductor Equipment | 7.85% | 21.27% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Information Technology | 3.25% | 15.65% | — | — | — | — | |
Based on: 10-K (reporting date: 2022-03-31), 10-K (reporting date: 2021-03-31), 10-K (reporting date: 2020-03-31), 10-K (reporting date: 2019-03-31), 10-K (reporting date: 2018-03-31), 10-K (reporting date: 2017-03-31).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,079,500 ÷ [(13,262,800 + 13,959,200) ÷ 2] = -7.93%
2 Click competitor name to see calculations.
An analysis of financial reporting quality from 2018 to 2022 reveals a period of significant volatility followed by a phase of stabilization. The most prominent shift occurred in the fiscal year ending March 31, 2019, characterized by a substantial increase in both net operating assets and the accruals ratio, before returning to a consistent downward trend in the following years.
- Net Operating Assets Trend
- A sharp increase in net operating assets is observed between 2018 and 2019, with values rising from 4.15 billion to 15.16 billion. Following this peak, a gradual and consistent decline occurred over the subsequent three years, resulting in a balance of 13.26 billion by March 31, 2022.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals remained negative for the majority of the period, indicating that cash flows from operations exceeded accrual-based earnings. A significant outlier is noted in 2019, where accruals spiked to 5.49 billion. From 2020 onward, accruals returned to negative territory, reaching a low of -1.39 billion in 2021 before moderating to -1.08 billion in 2022.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio demonstrates a high degree of variance, peaking at 56.87% in 2019. Outside of this anomaly, the ratio remained negative throughout the analyzed timeframe. The ratio shifted from -3.36% in 2018 to a more pronounced negative position of -9.74% in 2021, before ending at -7.93% in 2022. This sustained negative trajectory suggests an overall trend of high earnings quality, as accruals are consistently lower than the corresponding cash flows.
The convergence of declining net operating assets and consistently negative accruals ratios from 2020 to 2022 indicates a stabilization of the company's financial reporting quality and a reduction in the reliance on non-cash earnings components.
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