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
ON Semiconductor Corp., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 13,215,200) | 11,978,500) | 9,626,000) | 8,668,000) | 8,425,500) | |
| Less: Cash and cash equivalents | 2,483,000) | 2,919,000) | 1,352,600) | 1,080,700) | 894,200) | |
| Operating assets | 10,732,200) | 9,059,500) | 8,273,400) | 7,587,300) | 7,531,300) | |
| Operating Liabilities | ||||||
| Total liabilities | 5,414,600) | 5,771,500) | 5,021,600) | 5,109,900) | 5,101,400) | |
| Less: Current portion of financing lease liabilities | 800) | 14,200) | 12,700) | —) | —) | |
| Less: Current portion of long-term debt | 794,000) | 147,800) | 160,700) | 531,600) | 736,000) | |
| Less: Long-term debt, excluding current portion | 2,542,600) | 3,045,700) | 2,913,900) | 2,959,700) | 2,876,500) | |
| Less: Long-term financing lease liabilities | 22,400) | 23,000) | 10,200) | —) | —) | |
| Operating liabilities | 2,054,800) | 2,540,800) | 1,924,100) | 1,618,600) | 1,488,900) | |
| Net operating assets1 | 8,677,400) | 6,518,700) | 6,349,300) | 5,968,700) | 6,042,400) | |
| Balance-sheet-based aggregate accruals2 | 2,158,700) | 169,400) | 380,600) | (73,700) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 28.41% | 2.63% | 6.18% | -1.23% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Advanced Micro Devices Inc. | 2.36% | 169.75% | — | — | — | |
| Analog Devices Inc. | 0.03% | -2.94% | 90.70% | — | — | |
| Applied Materials Inc. | 0.48% | 20.73% | 17.33% | — | — | |
| Broadcom Inc. | -1.58% | -5.37% | -8.72% | — | — | |
| Intel Corp. | 13.69% | 10.73% | — | — | — | |
| KLA Corp. | 3.95% | 21.25% | — | — | — | |
| Lam Research Corp. | 1.57% | 16.02% | — | — | — | |
| Marvell Technology Inc. | -2.15% | 75.44% | — | — | — | |
| Micron Technology Inc. | 0.78% | 12.07% | — | — | — | |
| NVIDIA Corp. | 18.88% | 28.31% | — | — | — | |
| Qualcomm Inc. | -5.53% | 68.49% | 22.56% | — | — | |
| Texas Instruments Inc. | 31.37% | 22.75% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | 5.94% | 26.65% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 8.81% | 19.09% | 200.00% | — | — | |
Based on: 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), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 10,732,200 – 2,054,800 = 8,677,400
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 8,677,400 – 6,518,700 = 2,158,700
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,158,700 ÷ [(8,677,400 + 6,518,700) ÷ 2] = 28.41%
4 Click competitor name to see calculations.
The analysis of financial reporting quality from 2020 to 2023 reveals a substantial escalation in accrual levels, culminating in a significant peak in the final year. There is a clear trend of expanding net operating assets, which coincided with an aggressive increase in balance-sheet-based aggregate accruals.
- Net Operating Assets Trend
- Net operating assets grew steadily from US$ 5,968,700 thousand in 2020 to US$ 6,518,700 thousand in 2022, before experiencing a sharp increase to US$ 8,677,400 thousand by December 31, 2023. This represents a significant expansion of the asset base in the most recent reporting period.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals shifted from a negative value of US$ -73,700 thousand in 2020 to positive values in subsequent years. After a period of moderate fluctuations in 2021 and 2022, aggregate accruals surged to US$ 2,158,700 thousand in 2023, marking a drastic increase in non-cash earnings components.
- Accruals Ratio Interpretation
- The balance-sheet-based accruals ratio remained relatively low and stable between 2020 and 2022, ranging from -1.23% to 6.18%. However, the ratio spiked to 28.41% in 2023. Such a pronounced increase suggests a widening gap between reported accounting earnings and actual cash flow, which typically indicates a potential decrease in earnings quality and warrants a detailed review of the underlying drivers of these accruals.
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Cash-Flow-Statement-Based Accruals Ratio
ON Semiconductor Corp., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Net income attributable to ON Semiconductor Corporation | 2,183,700) | 1,902,200) | 1,009,600) | 234,200) | 211,700) | |
| Less: Net cash provided by operating activities | 1,977,500) | 2,633,100) | 1,782,000) | 884,300) | 694,700) | |
| Less: Net cash used in investing activities | (1,737,900) | (705,400) | (915,100) | (453,600) | (1,510,900) | |
| Cash-flow-statement-based aggregate accruals | 1,944,100) | (25,500) | 142,700) | (196,500) | 1,027,900) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 25.59% | -0.40% | 2.32% | -3.27% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Advanced Micro Devices Inc. | 1.17% | -15.28% | — | — | — | |
| Analog Devices Inc. | -0.57% | -2.54% | -11.85% | — | — | |
| Applied Materials Inc. | -2.05% | 18.18% | 14.75% | — | — | |
| Broadcom Inc. | -6.71% | -8.94% | -12.34% | — | — | |
| Intel Corp. | 11.35% | 2.75% | — | — | — | |
| KLA Corp. | 3.66% | 18.30% | — | — | — | |
| Lam Research Corp. | -1.71% | 12.43% | — | — | — | |
| Marvell Technology Inc. | -5.79% | 17.57% | — | — | — | |
| Micron Technology Inc. | -2.52% | 11.37% | — | — | — | |
| NVIDIA Corp. | -47.90% | 73.13% | — | — | — | |
| Qualcomm Inc. | -14.57% | 46.91% | 15.61% | — | — | |
| Texas Instruments Inc. | 26.35% | 28.24% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | 0.17% | 7.85% | 21.27% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 1.37% | 3.25% | 15.65% | — | — | |
Based on: 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), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,944,100 ÷ [(8,677,400 + 6,518,700) ÷ 2] = 25.59%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality indicates a period of relative stability in accrual levels from 2020 through 2022, followed by a significant divergence between accounting earnings and cash flows in 2023. The relationship between net operating assets and aggregate accruals suggests a marked shift in the company's financial position and reporting dynamics in the most recent fiscal year.
- Net Operating Assets Trend
- A consistent upward trajectory in net operating assets is observed, growing from 5.97 billion US dollars in 2020 to 6.52 billion US dollars by the end of 2022. A substantial acceleration occurred in 2023, with assets increasing to 8.68 billion US dollars, representing a growth of approximately 33% in a single year.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals exhibited fluctuation between 2020 and 2022, oscillating between negative 196.5 million US dollars and 142.7 million US dollars. This period of volatility transitioned into a sharp increase in 2023, where accruals surged to 1.94 billion US dollars, indicating a significant increase in non-cash earnings relative to cash flow.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio remained within a narrow range between -3.27% and 2.32% from 2020 to 2022, suggesting that reported earnings were closely aligned with cash flow generation during this interval. However, the ratio rose abruptly to 25.59% in 2023. This spike denotes a substantial increase in the proportion of earnings derived from accruals rather than cash, which typically warrants a closer examination of earnings quality and the sustainability of reported profits.
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