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
O’Reilly Automotive Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 11,718,707) | 11,596,642) | 10,717,160) | 7,980,789) | 7,571,885) | |
| Less: Cash and cash equivalents | 362,113) | 465,640) | 40,406) | 31,315) | 46,348) | |
| Operating assets | 11,356,594) | 11,131,002) | 10,676,754) | 7,949,474) | 7,525,537) | |
| Operating Liabilities | ||||||
| Total liabilities | 11,785,130) | 11,456,384) | 10,319,820) | 7,627,122) | 6,918,839) | |
| Less: Long-term debt | 3,826,978) | 4,123,217) | 3,890,527) | 3,417,122) | 2,978,390) | |
| Operating liabilities | 7,958,152) | 7,333,167) | 6,429,293) | 4,210,000) | 3,940,449) | |
| Net operating assets1 | 3,398,442) | 3,797,835) | 4,247,461) | 3,739,474) | 3,585,088) | |
| Balance-sheet-based aggregate accruals2 | (399,393) | (449,626) | 507,987) | 154,386) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -11.10% | -11.18% | 12.72% | 4.22% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Amazon.com Inc. | — | — | — | — | — | |
| Home Depot Inc. | — | — | — | — | — | |
| Lowe’s Cos. Inc. | — | — | — | — | — | |
| TJX Cos. Inc. | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Consumer Discretionary Distribution & Retail | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Discretionary | 200.00% | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= 11,356,594 – 7,958,152 = 3,398,442
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 3,398,442 – 3,797,835 = -399,393
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -399,393 ÷ [(3,398,442 + 3,797,835) ÷ 2] = -11.10%
4 Click competitor name to see calculations.
An analysis of the balance-sheet-based accruals indicates a significant shift in the relationship between operating assets and earnings over the four-year period ending December 31, 2021.
- Net Operating Assets Trend
- Net operating assets experienced an initial increase from 3,739,474 thousand USD in 2018 to a peak of 4,247,461 thousand USD in 2019. This was followed by a consistent downward trajectory, with values declining to 3,797,835 thousand USD in 2020 and further to 3,398,442 thousand USD by the end of 2021.
- Aggregate Accruals Performance
- Balance-sheet-based aggregate accruals demonstrated substantial volatility. After increasing from 154,386 thousand USD in 2018 to 507,987 thousand USD in 2019, the figures reversed sharply to negative values. Accruals reached -449,626 thousand USD in 2020 and remained negative at -399,393 thousand USD in 2021.
- Accruals Ratio Analysis
- The accruals ratio followed a similar pattern to aggregate accruals, rising from 4.22% in 2018 to 12.72% in 2019 before dropping to -11.18% in 2020 and settling at -11.10% in 2021. The transition from positive to negative ratios suggests a fundamental change in reporting quality; while the positive ratios in 2018 and 2019 indicate that accruals contributed to earnings, the negative ratios in 2020 and 2021 indicate that cash flows from operations exceeded reported accounting earnings, often a sign of more conservative financial reporting or higher earnings quality.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
Without a user account, I tend to respond rather slowly.
How can I help you?
Cash-Flow-Statement-Based Accruals Ratio
O’Reilly Automotive Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income | 2,164,685) | 1,752,302) | 1,391,042) | 1,324,487) | 1,133,804) | |
| Less: Net cash provided by operating activities | 3,207,310) | 2,836,603) | 1,708,479) | 1,727,555) | 1,403,687) | |
| Less: Net cash used in investing activities | (615,620) | (614,895) | (796,746) | (534,302) | (464,223) | |
| Cash-flow-statement-based aggregate accruals | (427,005) | (469,406) | 479,309) | 131,234) | 194,340) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -11.87% | -11.67% | 12.00% | 3.58% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Amazon.com Inc. | — | — | — | — | — | |
| Home Depot Inc. | — | — | — | — | — | |
| Lowe’s Cos. Inc. | — | — | — | — | — | |
| TJX Cos. Inc. | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Consumer Discretionary Distribution & Retail | 50.12% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Discretionary | 21.63% | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -427,005 ÷ [(3,398,442 + 3,797,835) ÷ 2] = -11.87%
2 Click competitor name to see calculations.
The financial reporting quality, as measured by the cash-flow-statement-based accruals ratio, exhibits a significant reversal in trend between 2019 and 2020, transitioning from positive accruals to sustained negative accruals.
- Net Operating Assets Trend
- Net operating assets experienced an initial increase, peaking at 4,247,461 thousand US dollars in 2019, followed by a consistent decline to 3,398,442 thousand US dollars by the end of 2021.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals shifted from a positive position of 131,234 thousand US dollars in 2018 to a peak of 479,309 thousand US dollars in 2019. This trend inverted sharply in 2020, with accruals falling to -469,406 thousand US dollars and remaining negative at -427,005 thousand US dollars in 2021.
- Accruals Ratio Interpretation
- The accruals ratio rose from 3.58% in 2018 to 12.00% in 2019, indicating that reported earnings exceeded cash flows during that timeframe. However, the ratio pivoted to -11.67% in 2020 and -11.87% in 2021. This shift toward negative accruals suggests a period where cash flow from operations exceeded reported earnings, a pattern typically associated with higher earnings quality and more conservative financial reporting.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
Without a user account, I tend to respond rather slowly.
How can I help you?