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
Old Dominion Freight Line Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 4,838,610) | 4,821,544) | 4,369,410) | 3,995,568) | 3,545,283) | |
| Less: Cash and cash equivalents | 186,312) | 462,564) | 401,430) | 403,571) | 190,282) | |
| Less: Short-term investments | 49,355) | 254,433) | 330,274) | —) | —) | |
| Operating assets | 4,602,943) | 4,104,547) | 3,637,706) | 3,591,997) | 3,355,001) | |
| Operating Liabilities | ||||||
| Total liabilities | 1,185,693) | 1,141,737) | 1,043,122) | 914,851) | 864,800) | |
| Less: Current maturities of long-term debt | 20,000) | —) | —) | —) | —) | |
| Less: Long-term debt, excluding current maturities | 79,963) | 99,947) | 99,931) | 45,000) | 45,000) | |
| Operating liabilities | 1,085,730) | 1,041,790) | 943,191) | 869,851) | 819,800) | |
| Net operating assets1 | 3,517,213) | 3,062,757) | 2,694,515) | 2,722,146) | 2,535,201) | |
| Balance-sheet-based aggregate accruals2 | 454,456) | 368,242) | (27,631) | 186,945) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 13.81% | 12.79% | -1.02% | 7.11% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| FedEx Corp. | 0.91% | — | — | — | — | |
| Uber Technologies Inc. | -40.74% | — | — | — | — | |
| Union Pacific Corp. | 3.63% | — | — | — | — | |
| United Airlines Holdings Inc. | 3.50% | — | — | — | — | |
| United Parcel Service Inc. | 26.54% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Transportation | 2.58% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | 0.67% | 200.00% | — | — | — | |
Based on: 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), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 4,602,943 – 1,085,730 = 3,517,213
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 3,517,213 – 3,062,757 = 454,456
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 454,456 ÷ [(3,517,213 + 3,062,757) ÷ 2] = 13.81%
4 Click competitor name to see calculations.
An analysis of the balance-sheet-based accruals from 2019 to 2022 reveals a period of initial volatility followed by a sustained increase in both the absolute value of accruals and the resulting accruals ratio. While net operating assets grew steadily after 2020, the growth in aggregate accruals outpaced asset expansion, leading to a notable increase in the accruals ratio by the end of the period.
- Net Operating Assets Trend
- Net operating assets remained relatively stable between 2019 and 2020, with a slight decrease from 2,722,146 thousand USD to 2,694,515 thousand USD. However, a significant growth trend emerged thereafter, with assets increasing to 3,062,757 thousand USD in 2021 and reaching 3,517,213 thousand USD by December 31, 2022. This represents a total increase of approximately 29% over the four-year horizon.
- Aggregate Accruals Performance
- Aggregate accruals exhibited substantial fluctuations. After starting at 186,945 thousand USD in 2019, the figure shifted to a negative 27,631 thousand USD in 2020. This reversal was followed by a sharp upward trajectory, with accruals climbing to 368,242 thousand USD in 2021 and further increasing to 454,456 thousand USD in 2022. The magnitude of the increase between 2020 and 2022 indicates a significant shift in the components of reported earnings relative to cash flow.
- Accruals Ratio Interpretation
- The balance-sheet-based accruals ratio mirrors the volatility seen in aggregate accruals. The ratio decreased from 7.11% in 2019 to -1.02% in 2020, suggesting a period where cash flows exceeded accrual-based earnings. Subsequently, the ratio rose sharply to 12.79% in 2021 and peaked at 13.81% in 2022. The steady climb in this ratio since 2020 suggests that a larger portion of the company's earnings is derived from non-cash accruals relative to its net operating asset base, which typically warrants closer scrutiny regarding the sustainability of earnings quality.
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Cash-Flow-Statement-Based Accruals Ratio
Old Dominion Freight Line Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income | 1,377,159) | 1,034,375) | 672,682) | 615,518) | 605,668) | |
| Less: Net cash provided by operating activities | 1,691,582) | 1,212,606) | 933,024) | 983,888) | 900,116) | |
| Less: Net cash used in investing activities | (547,472) | (455,288) | (551,663) | (473,639) | (580,391) | |
| Cash-flow-statement-based aggregate accruals | 233,049) | 277,057) | 291,321) | 105,269) | 285,943) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 7.08% | 9.62% | 10.76% | 4.00% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| FedEx Corp. | 2.12% | — | — | — | — | |
| Uber Technologies Inc. | -49.13% | — | — | — | — | |
| Union Pacific Corp. | 2.53% | — | — | — | — | |
| United Airlines Holdings Inc. | 38.00% | — | — | — | — | |
| United Parcel Service Inc. | 16.44% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Transportation | 4.77% | 2.42% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | -2.30% | -17.51% | — | — | — | |
Based on: 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), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 233,049 ÷ [(3,517,213 + 3,062,757) ÷ 2] = 7.08%
2 Click competitor name to see calculations.
The analysis of financial reporting quality between 2019 and 2022 reveals a period of increased accruals relative to net operating assets, followed by a gradual stabilization in the quality of earnings.
- Net Operating Assets Trend
- Net operating assets remained relatively stable between 2019 and 2020, with a slight decrease from US$ 2,722,146 thousand to US$ 2,694,515 thousand. A significant growth trajectory followed, with assets increasing to US$ 3,062,757 thousand in 2021 and reaching US$ 3,517,213 thousand by December 31, 2022, reflecting an expansion of the operating base.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals experienced a sharp increase in 2020, rising from US$ 105,269 thousand in 2019 to US$ 291,321 thousand. While these accruals remained high compared to 2019 levels, a downward trend emerged over the following two years, with values decreasing to US$ 277,057 thousand in 2021 and further to US$ 233,049 thousand in 2022.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio rose sharply from 4.00% in 2019 to a peak of 10.76% in 2020, indicating a widening gap between accounting earnings and cash flow. Since the 2020 peak, the ratio has steadily declined to 9.62% in 2021 and 7.08% in 2022. This contraction suggests an improvement in earnings quality as the cash-flow-based accruals ratio normalized relative to the growth in net operating assets.
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