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
Palo Alto Networks Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Jul 31, 2024 | Jul 31, 2023 | Jul 31, 2022 | Jul 31, 2021 | Jul 31, 2020 | Jul 31, 2019 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 19,990,900) | 14,501,100) | 12,253,600) | 10,241,600) | 9,065,400) | 6,592,200) | |
| Less: Cash and cash equivalents | 1,535,200) | 1,135,300) | 2,118,500) | 1,874,200) | 2,958,000) | 961,400) | |
| Less: Short-term investments | 1,043,600) | 1,254,700) | 1,516,000) | 1,026,900) | 789,800) | 1,841,700) | |
| Operating assets | 17,412,100) | 12,111,100) | 8,619,100) | 7,340,500) | 5,317,600) | 3,789,100) | |
| Operating Liabilities | |||||||
| Total liabilities | 14,821,200) | 12,752,700) | 12,043,600) | 9,478,000) | 7,963,600) | 5,005,900) | |
| Less: Current portion of convertible senior notes, net | 963,900) | 1,991,500) | 3,676,800) | 1,557,900) | —) | —) | |
| Less: Convertible senior notes, net, excluding current portion | —) | —) | —) | 1,668,100) | 3,084,100) | 1,430,000) | |
| Operating liabilities | 13,857,300) | 10,761,200) | 8,366,800) | 6,252,000) | 4,879,500) | 3,575,900) | |
| Net operating assets1 | 3,554,800) | 1,349,900) | 252,300) | 1,088,500) | 438,100) | 213,200) | |
| Balance-sheet-based aggregate accruals2 | 2,204,900) | 1,097,600) | (836,200) | 650,400) | 224,900) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 89.91% | 137.01% | -124.73% | 85.21% | 69.06% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Accenture PLC | 35.69% | 16.32% | 21.70% | 27.93% | 3.73% | — | |
| Adobe Inc. | -3.83% | 1.85% | -8.24% | 14.14% | 8.20% | — | |
| Cadence Design Systems Inc. | 39.84% | 11.17% | 26.65% | 4.43% | — | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | — | |
| Fair Isaac Corp. | 6.46% | 12.11% | -3.66% | -6.17% | -0.02% | — | |
| International Business Machines Corp. | 2.79% | 2.42% | 1.55% | -7.39% | — | — | |
| Intuit Inc. | 3.35% | -1.74% | 85.68% | 139.73% | -1.39% | — | |
| Microsoft Corp. | 52.18% | 22.96% | 42.27% | 40.52% | 14.41% | — | |
| Oracle Corp. | 4.30% | 51.77% | 9.90% | 5.62% | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | — | |
| Salesforce Inc. | -2.46% | -2.30% | 57.74% | 10.87% | — | — | |
| ServiceNow Inc. | 22.91% | 61.79% | 12.89% | 34.89% | — | — | |
| Synopsys Inc. | 7.85% | 13.85% | 5.01% | 0.36% | 8.40% | — | |
| Workday Inc. | 28.44% | -11.24% | 55.93% | -15.99% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Software & Services | 26.35% | 18.48% | 29.42% | 16.66% | 200.00% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Information Technology | 21.42% | 8.98% | 18.09% | 19.16% | 200.00% | — | |
Based on: 10-K (reporting date: 2024-07-31), 10-K (reporting date: 2023-07-31), 10-K (reporting date: 2022-07-31), 10-K (reporting date: 2021-07-31), 10-K (reporting date: 2020-07-31), 10-K (reporting date: 2019-07-31).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 17,412,100 – 13,857,300 = 3,554,800
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 3,554,800 – 1,349,900 = 2,204,900
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,204,900 ÷ [(3,554,800 + 1,349,900) ÷ 2] = 89.91%
4 Click competitor name to see calculations.
The data reveals substantial fluctuations in the net operating assets over the observed periods. Starting at approximately 438.1 million US dollars in mid-2020, the figure more than doubled by mid-2021 to about 1.09 billion US dollars. However, this was followed by a significant decline in mid-2022 to approximately 252.3 million US dollars. Afterward, there was a notable recovery and growth trend, culminating in a sharp increase by mid-2024 to roughly 3.55 billion US dollars, indicating substantial expansion in operating assets in the most recent period.
Aggregate accruals based on the balance sheet exhibit pronounced volatility. They rose markedly from around 224.9 million US dollars in mid-2020 to approximately 650.4 million US dollars in mid-2021. This was followed by a dramatic reversal to a negative value of about -836.2 million US dollars in mid-2022, implying a significant adjustment or reversal of prior accruals. The figure then rebounded strongly in the subsequent years, escalating to nearly 1.1 billion US dollars in mid-2023 and further to approximately 2.2 billion US dollars in mid-2024, reflecting considerable accrual activity and possible changes in accounting estimates or operational conditions.
The balance-sheet-based accruals ratio mirrors the fluctuations seen in aggregate accruals with high variability and significant swings. It started at 69.06% in mid-2020 and increased to 85.21% a year later, indicating a rising proportion of accruals relative to net operating assets. The ratio then plunged sharply to -124.73% in mid-2022, signaling accruals reversed and exceeded net operating assets in the negative direction. Following this dip, the ratio surged to 137.01% in mid-2023 before easing to 89.91% in mid-2024. These variations suggest changes in accounting estimates or earnings management practices that may affect the quality and sustainability of reported earnings over time.
- Key Observations
- The overall pattern indicates substantial volatility in both net operating assets and accrual-based measures, with marked oscillations especially in accruals and their ratio relative to operating assets.
- The dramatic reversals in accrual figures and ratios suggest potential shifts in financial reporting practices or operational factors influencing earnings quality.
- The latest period (mid-2024) shows significant growth in net operating assets coupled with a high accrual ratio, which may warrant further investigation into the underlying drivers and implications for financial reporting quality.
Cash-Flow-Statement-Based Accruals Ratio
Palo Alto Networks Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Jul 31, 2024 | Jul 31, 2023 | Jul 31, 2022 | Jul 31, 2021 | Jul 31, 2020 | Jul 31, 2019 | ||
|---|---|---|---|---|---|---|---|
| Net income (loss) | 2,577,600) | 439,700) | (267,000) | (498,900) | (267,000) | (81,900) | |
| Less: Net cash provided by operating activities | 3,257,600) | 2,777,500) | 1,984,700) | 1,503,000) | 1,035,700) | 1,055,600) | |
| Less: Net cash (used in) provided by investing activities | (1,509,900) | (2,033,800) | (933,400) | (1,480,600) | 288,000) | (1,825,900) | |
| Cash-flow-statement-based aggregate accruals | 829,900) | (304,000) | (1,318,300) | (521,300) | (1,590,700) | 688,400) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 33.84% | -37.95% | -196.64% | -68.30% | -488.47% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Accenture PLC | 24.31% | -0.19% | 11.87% | 11.80% | -13.65% | — | |
| Adobe Inc. | -21.90% | -21.73% | -19.93% | 9.21% | -0.48% | — | |
| Cadence Design Systems Inc. | 17.36% | 3.78% | 15.03% | -5.75% | — | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | — | |
| Fair Isaac Corp. | -8.60% | -2.41% | -13.92% | -17.25% | -10.25% | — | |
| International Business Machines Corp. | -3.73% | 0.99% | -7.22% | -1.64% | — | — | |
| Intuit Inc. | -8.44% | -8.74% | 25.60% | 58.72% | -34.22% | — | |
| Microsoft Corp. | 30.89% | 5.22% | 13.42% | 17.68% | -8.19% | — | |
| Oracle Corp. | -1.01% | 42.79% | -30.58% | 25.81% | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | — | |
| Salesforce Inc. | -8.44% | -8.49% | 21.96% | 10.57% | — | — | |
| ServiceNow Inc. | -7.12% | 15.44% | 8.80% | -21.14% | — | — | |
| Synopsys Inc. | -7.64% | 0.20% | -4.64% | -4.88% | 0.92% | — | |
| Workday Inc. | 34.56% | 18.64% | -0.65% | -18.51% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Software & Services | 12.10% | 7.37% | 1.97% | 11.15% | -28.80% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Information Technology | 6.29% | 1.46% | 2.91% | 8.62% | -15.54% | — | |
Based on: 10-K (reporting date: 2024-07-31), 10-K (reporting date: 2023-07-31), 10-K (reporting date: 2022-07-31), 10-K (reporting date: 2021-07-31), 10-K (reporting date: 2020-07-31), 10-K (reporting date: 2019-07-31).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 829,900 ÷ [(3,554,800 + 1,349,900) ÷ 2] = 33.84%
2 Click competitor name to see calculations.
The data presents a complex pattern of net operating assets and cash-flow-statement-based measures over a five-year span. Several notable trends emerge upon analysis:
- Net Operating Assets
- The net operating assets exhibit pronounced variability with an overall upward trend, starting at 438.1 million in mid-2020 and rising to 3.55 billion by mid-2024. However, the data reveal significant fluctuations: a sharp increase from 438.1 million to 1.089 billion between 2020 and 2021, followed by a decline to 252.3 million in 2022. After this dip, the metric more than quintuples within two years, reaching 3.55 billion by 2024. This irregular movement suggests episodic changes in operational investment or asset management strategies.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals derived from cash flow statements demonstrate considerable volatility and a shift in pattern over the period. Initially, the values are strongly negative (-1.59 billion in 2020), indicating substantial accrual deductions from cash flows. This negative trend mitigates in 2021 to -521.3 million but rebounds to -1.32 billion in 2022. Subsequently, there is a marked reduction in negativity to -304 million in 2023, culminating in a positive value of 829.9 million in 2024. The transition from sustained negative to positive accruals may reflect changes in earnings management, accounting estimates, or operational cash cycle dynamics.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrors the fluctuations in aggregate accruals but also provides insight into the relative scale of accruals to operating cash flows. The ratio is substantially negative in 2020 (-488.47%), implying accruals exceed operating cash flows by a large factor. This ratio greatly improves to -68.3% in 2021, then deteriorates again to -196.64% in 2022. From 2022 onward, the ratio increases significantly, reaching -37.95% in 2023 and turning positive at 33.84% in 2024. The positive ratio in 2024 suggests a shift towards accrued revenues or expenses contributing positively relative to operating cash flow, which may indicate an improvement in financial reporting quality or a change in accrual accounting policies.
In summary, the data reveal notable fluctuations in both net operating assets and accruals-related measures, with an overall trend toward increasing net operating assets and a pronounced shift from negative to positive accruals ratios by 2024. These patterns may reflect significant operational changes, evolving financial management practices, or alterations in accounting policies impacting financial reporting quality.