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, 2025 | Jul 31, 2024 | Jul 31, 2023 | Jul 31, 2022 | Jul 31, 2021 | Jul 31, 2020 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 23,576,200) | 19,990,900) | 14,501,100) | 12,253,600) | 10,241,600) | 9,065,400) | |
| Less: Cash and cash equivalents | 2,268,600) | 1,535,200) | 1,135,300) | 2,118,500) | 1,874,200) | 2,958,000) | |
| Less: Short-term investments | 634,600) | 1,043,600) | 1,254,700) | 1,516,000) | 1,026,900) | 789,800) | |
| Operating assets | 20,673,000) | 17,412,100) | 12,111,100) | 8,619,100) | 7,340,500) | 5,317,600) | |
| Operating Liabilities | |||||||
| Total liabilities | 15,751,800) | 14,821,200) | 12,752,700) | 12,043,600) | 9,478,000) | 7,963,600) | |
| 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) | |
| Operating liabilities | 15,751,800) | 13,857,300) | 10,761,200) | 8,366,800) | 6,252,000) | 4,879,500) | |
| Net operating assets1 | 4,921,200) | 3,554,800) | 1,349,900) | 252,300) | 1,088,500) | 438,100) | |
| Balance-sheet-based aggregate accruals2 | 1,366,400) | 2,204,900) | 1,097,600) | (836,200) | 650,400) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 32.24% | 89.91% | 137.01% | -124.73% | 85.21% | — | |
| 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. | — | — | — | — | — | — | |
| Datadog Inc. | — | -28.51% | -35.73% | 17.56% | 173.39% | — | |
| 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. | 3.52% | 3.35% | -1.74% | 85.68% | 139.73% | — | |
| Microsoft Corp. | 21.81% | 52.18% | 22.96% | 42.27% | 40.52% | — | |
| Oracle Corp. | 20.79% | 4.30% | 51.77% | 9.90% | 5.62% | — | |
| Palantir Technologies Inc. | — | — | — | — | — | — | |
| Salesforce Inc. | 0.71% | -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. | 20.74% | 28.44% | -11.24% | 55.93% | -15.99% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Software & Services | 0.00% | 26.34% | 18.45% | 29.41% | 16.74% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Information Technology | 0.00% | 21.41% | 8.97% | 18.09% | 19.19% | — | |
Based on: 10-K (reporting date: 2025-07-31), 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).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= 20,673,000 – 15,751,800 = 4,921,200
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= 4,921,200 – 3,554,800 = 1,366,400
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,366,400 ÷ [(4,921,200 + 3,554,800) ÷ 2] = 32.24%
4 Click competitor name to see calculations.
The data reveals notable fluctuations in the financial reporting quality indicators over the examined periods, reflecting changes in the company's asset management and accrual practices.
- Net Operating Assets
- The net operating assets show considerable volatility from 2021 to 2025. Initially valued at approximately $1.09 billion in 2021, there is a sharp decline in 2022 to around $252 million. This is followed by a marked recovery and growth, reaching $1.35 billion in 2023, a further substantial increase to $3.55 billion in 2024, and peaking at $4.92 billion in 2025. The upward trend in the latter years suggests an expansion in the company's operational asset base, potentially indicating business growth or increased capital investment.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals demonstrate high variability, with values fluctuating dramatically over the years. From a positive $650 million in 2021, the figure shifts to a significant negative value of approximately -$836 million in 2022, indicating notable changes in non-cash adjustments. Thereafter, the accruals rise sharply to $1.10 billion in 2023, peak at $2.20 billion in 2024, and decline to $1.37 billion in 2025. The oscillating accrual values suggest periods of aggressive accrual accounting or changes in earnings management practices.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio exhibits extreme swings and a general downward trend in the latter years. Starting at 85.21% in 2021, the ratio turns negative in 2022 at -124.73%, reflecting the negative aggregate accruals during that period. Subsequently, it sharply increases to 137.01% in 2023, then decreases to 89.91% in 2024, and further declines to 32.24% in 2025. The high positive and negative values indicate significant volatility in accruals relative to net operating assets, which can impact the reliability of reported earnings. The declining ratio in the last two years may indicate a movement towards more conservative or stable accrual accounting practices.
Overall, the data points to substantial fluctuations in both net operating assets and accrual measures, which could reflect changes in business operations, accounting policies, or management strategies over time. The marked volatility in accruals, particularly in 2022 and 2023, may warrant further investigation to assess earnings quality and the sustainability of reported financial performance.
Cash-Flow-Statement-Based Accruals Ratio
Palo Alto Networks Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Jul 31, 2025 | Jul 31, 2024 | Jul 31, 2023 | Jul 31, 2022 | Jul 31, 2021 | Jul 31, 2020 | ||
|---|---|---|---|---|---|---|---|
| Net income (loss) | 1,133,900) | 2,577,600) | 439,700) | (267,000) | (498,900) | (267,000) | |
| Less: Net cash provided by operating activities | 3,716,000) | 3,257,600) | 2,777,500) | 1,984,700) | 1,503,000) | 1,035,700) | |
| Less: Net cash (used in) provided by investing activities | (2,204,700) | (1,509,900) | (2,033,800) | (933,400) | (1,480,600) | 288,000) | |
| Cash-flow-statement-based aggregate accruals | (377,400) | 829,900) | (304,000) | (1,318,300) | (521,300) | (1,590,700) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | -8.91% | 33.84% | -37.95% | -196.64% | -68.30% | — | |
| 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. | — | — | — | — | — | — | |
| Datadog Inc. | — | 30.92% | 53.36% | -34.44% | -28.18% | — | |
| 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. | -0.10% | -8.44% | -8.74% | 25.60% | 58.72% | — | |
| Microsoft Corp. | 12.55% | 30.89% | 5.22% | 13.42% | 17.68% | — | |
| Oracle Corp. | 13.98% | -1.01% | 42.79% | -30.58% | 25.81% | — | |
| Palantir Technologies Inc. | — | — | — | — | — | — | |
| Salesforce Inc. | -6.66% | -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. | -4.25% | 34.56% | 18.64% | -0.65% | -18.51% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Software & Services | 0.00% | 12.10% | 7.40% | 1.94% | 11.13% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Information Technology | 0.00% | 6.30% | 1.47% | 2.90% | 8.62% | — | |
Based on: 10-K (reporting date: 2025-07-31), 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).
1 2025 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -377,400 ÷ [(4,921,200 + 3,554,800) ÷ 2] = -8.91%
2 Click competitor name to see calculations.
The analysis of the financial quality measures reveals significant fluctuations over the reported periods, indicating considerable variability in the company's operational and accrual activities.
- Net Operating Assets
- There is an overall upward trend in net operating assets, increasing from approximately 1,088,500 thousand USD in mid-2021 to 4,921,200 thousand USD projected for mid-2025. A notable dip is observed in 2022, where net operating assets decreased to 252,300 thousand USD before rising substantially in subsequent years. This pattern may suggest strategic asset investments or operational scaling occurring after 2022.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals exhibit volatility, with negative values in the years 2021 (-521,300 thousand USD), 2022 (-1,318,300 thousand USD), 2023 (-304,000 thousand USD), and 2025 (-377,400 thousand USD), contrasted by a positive value in 2024 (829,900 thousand USD). The sharp negative peak in 2022 indicates a significant adjustment or accrual that reduced reported earnings relative to cash flow, while the positive figure in 2024 suggests a reversal or unusual inflow. These fluctuations reflect inconsistent earnings adjustments relative to cash flows across the periods.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio moves from a negative -68.3% in 2021 to a substantially more negative -196.64% in 2022, followed by a less negative -37.95% in 2023. Notably, there is a positive ratio of 33.84% in 2024, indicating the company recorded accruals exceeding its cash flows during this year, before declining to -8.91% in 2025. This erratic pattern implies volatility in the relationship between net income and operating cash flows, which could signal variable earnings quality or changes in accrual accounting practices.
In summary, the data indicate rising net operating assets over time, punctuated by significant variations in accruals and their ratios. These factors collectively suggest oscillating earnings quality and financial reporting dynamics during the analyzed timeframe.