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
Monolithic Power Systems 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 | 3,617,097) | 2,434,353) | 2,058,885) | 1,585,825) | 1,208,491) | |
| Less: Cash and cash equivalents | 691,816) | 527,843) | 288,607) | 189,265) | 334,944) | |
| Less: Short-term investments | 171,130) | 580,633) | 449,266) | 535,817) | 260,169) | |
| Less: Restricted cash | —) | 33,204) | —) | —) | —) | |
| Operating assets | 2,754,151) | 1,292,673) | 1,321,012) | 860,743) | 613,378) | |
| Operating Liabilities | ||||||
| Total liabilities | 471,330) | 384,414) | 390,283) | 341,840) | 241,904) | |
| Operating liabilities | 471,330) | 384,414) | 390,283) | 341,840) | 241,904) | |
| Net operating assets1 | 2,282,821) | 908,259) | 930,729) | 518,903) | 371,474) | |
| Balance-sheet-based aggregate accruals2 | 1,374,562) | (22,470) | 411,826) | 147,429) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 86.15% | -2.44% | 56.82% | 33.12% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Advanced Micro Devices Inc. | 2.94% | 2.36% | 169.75% | — | — | |
| Analog Devices Inc. | -2.83% | 0.03% | -2.94% | 90.70% | — | |
| Applied Materials Inc. | 4.18% | 0.48% | 20.73% | 17.33% | — | |
| Broadcom Inc. | 87.89% | -1.58% | -5.37% | -8.72% | — | |
| Intel Corp. | -0.91% | 13.69% | 10.73% | — | — | |
| KLA Corp. | -1.32% | 3.95% | 21.25% | — | — | |
| Lam Research Corp. | -2.70% | 1.57% | 16.02% | — | — | |
| Marvell Technology Inc. | -6.29% | -2.15% | 75.44% | — | — | |
| Micron Technology Inc. | 5.22% | 0.78% | 12.07% | — | — | |
| NVIDIA Corp. | 29.90% | 18.88% | 28.31% | — | — | |
| Qualcomm Inc. | 7.33% | -5.53% | 68.49% | 22.56% | — | |
| Texas Instruments Inc. | 15.89% | 31.37% | 22.75% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | 18.65% | 5.94% | 26.65% | 200.00% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 20.88% | 8.81% | 19.09% | 200.00% | — | |
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
= 2,754,151 – 471,330 = 2,282,821
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 2,282,821 – 908,259 = 1,374,562
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,374,562 ÷ [(2,282,821 + 908,259) ÷ 2] = 86.15%
4 Click competitor name to see calculations.
An analysis of the balance-sheet-based accruals indicates significant volatility in financial reporting quality metrics over the four-year period. The relationship between net operating assets and aggregate accruals demonstrates a non-linear progression, culminating in a substantial increase in both metrics by the end of 2024.
- Net Operating Assets Evolution
- Net operating assets expanded from 518.9 million in 2021 to 930.7 million in 2022, followed by a marginal decline to 908.3 million in 2023. A sharp acceleration occurred in 2024, with assets increasing to 2.28 billion, indicating a significant expansion of the operating balance sheet.
- Aggregate Accruals Fluctuations
- Aggregate accruals exhibited extreme variance, rising from 147.4 million in 2021 to 411.8 million in 2022, before shifting to a negative value of 22.5 million in 2023. This reversal suggests a period where cash flows from operations exceeded accrual-based earnings. By 2024, accruals rose sharply to 1.37 billion, marking the highest level in the observed timeframe.
- Accruals Ratio Dynamics
- The accruals ratio reflects this instability, increasing from 33.12% in 2021 to 56.82% in 2022. The contraction to -2.44% in 2023 indicates a temporary alignment of earnings with cash receipts. However, the surge to 86.15% in 2024 represents a significant divergence, where a substantial portion of the reported operating assets consists of accruals, which may suggest a decrease in the immediate quality of earnings relative to the previous year.
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Cash-Flow-Statement-Based Accruals Ratio
Monolithic Power Systems 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 | 1,786,700) | 427,374) | 437,672) | 242,023) | 164,375) | |
| Less: Net cash provided by operating activities | 788,410) | 638,213) | 246,674) | 320,010) | 267,803) | |
| Less: Net cash (used in) provided by investing activities | 223,047) | (178,726) | (12,510) | (378,886) | (39,177) | |
| Cash-flow-statement-based aggregate accruals | 775,243) | (32,113) | 203,508) | 300,899) | (64,251) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 48.59% | -3.49% | 28.08% | 67.59% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Advanced Micro Devices Inc. | -0.56% | 1.17% | -15.28% | — | — | |
| Analog Devices Inc. | -2.71% | -0.57% | -2.54% | -11.85% | — | |
| Applied Materials Inc. | 5.35% | -2.05% | 18.18% | 14.75% | — | |
| Broadcom Inc. | 10.29% | -6.71% | -8.94% | -12.34% | — | |
| Intel Corp. | -6.58% | 11.35% | 2.75% | — | — | |
| KLA Corp. | 16.82% | 3.66% | 18.30% | — | — | |
| Lam Research Corp. | -5.83% | -1.71% | 12.43% | — | — | |
| Marvell Technology Inc. | -10.48% | -5.79% | 17.57% | — | — | |
| Micron Technology Inc. | 1.18% | -2.52% | 11.37% | — | — | |
| NVIDIA Corp. | 52.67% | -47.90% | 73.13% | — | — | |
| Qualcomm Inc. | 5.53% | -14.57% | 46.91% | 15.61% | — | |
| Texas Instruments Inc. | 7.93% | 26.35% | 28.24% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | 2.92% | 0.17% | 7.85% | 21.27% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 5.99% | 1.37% | 3.25% | 15.65% | — | |
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 × 775,243 ÷ [(2,282,821 + 908,259) ÷ 2] = 48.59%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality indicates a period of significant volatility in accruals coinciding with a substantial expansion of the balance sheet's operating assets between 2021 and 2024.
- Net Operating Assets Growth
- A strong upward trajectory is observed in net operating assets, which increased from 518.9 million US dollars in 2021 to 2.28 billion US dollars by 2024. Although growth slowed and experienced a slight contraction between 2022 and 2023, a sharp acceleration occurred in 2024, where operating assets more than doubled compared to the previous year.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals displayed a non-linear trend, starting at 300.9 million US dollars in 2021 and declining to a negative 32.1 million US dollars in 2023. This trend reversed sharply in 2024, with accruals surging to 775.2 million US dollars, indicating a significant increase in non-cash earnings components during the most recent fiscal period.
- Accruals Ratio Interpretation
- The cash-flow-statement-based accruals ratio exhibits extreme fluctuations, falling from 67.59% in 2021 to a low of -3.49% in 2023. The negative ratio in 2023 suggests a period where operating cash flows exceeded accrual-based earnings, typically associated with higher earnings quality. However, the ratio rebounded to 48.59% in 2024, signaling a renewed and substantial divergence between reported net income and actual cash flow generation.
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