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. | 49.06% | — | — | — | — | |
| Home Depot Inc. | 21.77% | — | — | — | — | |
| Lowe’s Cos. Inc. | -12.39% | — | — | — | — | |
| TJX Cos. Inc. | -109.84% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Consumer Discretionary Distribution & Retail | 31.88% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Discretionary | 12.78% | 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.
The analysis of the annual financial reporting quality measures reveals notable fluctuations over the four-year period assessed.
- Net Operating Assets
- The net operating assets exhibit variability, increasing from 3,739,474 thousand US dollars in 2018 to a peak of 4,247,461 thousand US dollars in 2019, followed by a decline to 3,797,835 thousand US dollars in 2020 and further decreasing to 3,398,442 thousand US dollars in 2021. This indicates a trend of initial growth in operating assets, succeeded by a period of contraction over the last two years analyzed.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals show significant volatility, moving from a positive value of 154,386 thousand US dollars in 2018 to a substantially higher positive 507,987 thousand US dollars in 2019. However, this shifts dramatically to negative values in subsequent years: -449,626 thousand US dollars in 2020 and -399,393 thousand US dollars in 2021. This shift from positive to negative accruals suggests changing accounting estimates or timing differences in revenue and expense recognition, which may impact the interpretation of earnings quality.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio follows a similar pattern, starting at 4.22% in 2018, rising sharply to 12.72% in 2019, then dropping to -11.18% in 2020 and slightly increasing to -11.10% in 2021. The positive ratio in the initial years indicates accruals contributing positively to earnings, whereas the negative ratios in the later years suggest accruals detracting from earnings. The magnitude of change also points to increased volatility in accruals relative to net operating assets.
Overall, the data reflects a period of growth in net operating assets followed by contraction, coupled with a reversal and increased fluctuation in accruals. These changes may imply evolving financial policies, shifts in operational efficiency, or changes in earnings management practices over the analyzed period.
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. | 48.44% | — | — | — | — | |
| Home Depot Inc. | 14.26% | — | — | — | — | |
| Lowe’s Cos. Inc. | -17.28% | — | — | — | — | |
| TJX Cos. Inc. | -121.39% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Consumer Discretionary Distribution & Retail | 29.06% | 27.98% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Discretionary | 11.50% | 6.55% | — | — | — | |
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 analysis of the annual financial reporting quality measures over the four-year period reveals notable fluctuations and trends in the company's operational and accrual-related figures.
- Net Operating Assets
- There is an initial increase in net operating assets from approximately 3.74 billion US dollars at the end of 2018 to about 4.25 billion US dollars by the end of 2019. This growth is followed by a decline, with net operating assets decreasing to roughly 3.80 billion US dollars in 2020 and further down to approximately 3.40 billion US dollars in 2021. The trend suggests a peak in 2019 followed by a gradual reduction in net operating assets over the following two years.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals display considerable volatility during this period. Starting with a positive figure of about 131 million US dollars in 2018, there is a significant rise to nearly 479 million US dollars in 2019. However, this is succeeded by a reversal to negative values, reaching approximately -469 million US dollars in 2020 and slightly decreasing further to around -427 million US dollars in 2021. The shift from positive to large negative accruals indicates a change in the underlying accrual accounting processes or operational cash flow timing.
- Cash-Flow-Statement-Based Accruals Ratio
- This ratio aligns with the pattern observed in aggregate accruals. It starts at a moderate 3.58% in 2018, sharply rises to 12% in 2019, signifying a larger proportion of accruals to net operating assets at that time. Subsequently, the ratio turns negative in both 2020 and 2021, at -11.67% and -11.87%, respectively. The consistent negative values in the latter two years highlight the presence of negative accrual adjustments relative to cash flow, possibly reflecting adjustments in earnings quality or timing differences between earnings recognition and cash flows.
Overall, the data indicates a peak in net operating assets in 2019 accompanied by unusually high positive accruals, followed by a decline in the asset base and a reversal to significant negative accruals in 2020 and 2021. These dynamics could reflect changes in business operations, accounting practices, or external conditions affecting financial statement quality over the analyzed period.