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
Roper Technologies 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 | 26,980,800) | 23,713,900) | 24,024,800) | 18,108,900) | 15,249,500) | |
| Less: Cash and cash equivalents | 792,800) | 351,500) | 308,300) | 709,700) | 364,400) | |
| Operating assets | 26,188,000) | 23,362,400) | 23,716,500) | 17,399,200) | 14,885,100) | |
| Operating Liabilities | ||||||
| Total liabilities | 10,943,000) | 12,150,100) | 13,545,000) | 8,617,000) | 7,511,000) | |
| Less: Current portion of long-term debt, net | 699,200) | 799,200) | 502,000) | 602,200) | 1,500) | |
| Less: Long-term debt, net of current portion | 5,962,500) | 7,122,600) | 9,064,500) | 4,673,100) | 4,940,200) | |
| Operating liabilities | 4,281,300) | 4,228,300) | 3,978,500) | 3,341,700) | 2,569,300) | |
| Net operating assets1 | 21,906,700) | 19,134,100) | 19,738,000) | 14,057,500) | 12,315,800) | |
| Balance-sheet-based aggregate accruals2 | 2,772,600) | (603,900) | 5,680,500) | 1,741,700) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 13.51% | -3.11% | 33.62% | 13.21% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Apple Inc. | -2.12% | 36.09% | -11.31% | — | — | |
| Arista Networks Inc. | 106.22% | 24.14% | — | — | — | |
| Cisco Systems Inc. | 5.96% | 20.24% | -7.26% | — | — | |
| Dell Technologies Inc. | -89.81% | -10.71% | — | — | — | |
| Super Micro Computer Inc. | 58.35% | 8.42% | 20.97% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Technology Hardware & Equipment | -13.35% | 22.01% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 18.09% | 19.19% | 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
= 26,188,000 – 4,281,300 = 21,906,700
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 21,906,700 – 19,134,100 = 2,772,600
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,772,600 ÷ [(21,906,700 + 19,134,100) ÷ 2] = 13.51%
4 Click competitor name to see calculations.
The analysis of the annual financial reporting quality measures reveals the following trends over the four-year period ending December 31, 2022.
- Net Operating Assets
- There has been a generally increasing trend in net operating assets. Starting at approximately 14.06 billion US dollars in 2019, the figure rose sharply to nearly 19.74 billion in 2020. Although there was a slight decline to around 19.13 billion in 2021, the value increased again in 2022, reaching approximately 21.91 billion. This overall upward movement suggests growth in the company’s operational asset base.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals show a volatile pattern. In 2019, accruals stood at about 1.74 billion US dollars, escalating significantly to 5.68 billion in 2020. However, in 2021, this measure drastically decreased, turning negative at approximately -0.60 billion. Subsequently, it returned to a positive figure of 2.77 billion in 2022. The fluctuation indicates unstable accrual accounting practices or variations in earnings quality across the years.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio reflects similar volatility. The ratio was 13.21% in 2019 and rose sharply to 33.62% in 2020, indicating a significant increase in accruals relative to operating assets. In 2021, the ratio dropped to -3.11%, aligning with the negative aggregate accruals for that year, and then increased to 13.51% in 2022. These swings may imply inconsistent earnings management or changes in operational efficiency and financial reporting practices.
Overall, there is evidence of growth in net operating assets across the period, yet the patterns in aggregate accruals and the accruals ratio point toward fluctuations in the quality or consistency of earnings. The marked peaks and troughs in accrual-related metrics warrant closer scrutiny to understand the underlying causes, which could range from accounting policy changes to operational factors influencing earnings recognition.
Cash-Flow-Statement-Based Accruals Ratio
Roper Technologies 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 earnings | 4,544,700) | 1,152,600) | 949,700) | 1,767,900) | 944,400) | |
| Less: Cash provided by operating activities | 606,600) | 1,866,200) | 1,525,100) | 1,461,800) | 1,430,100) | |
| Less: Cash used in investing activities | (4,351,800) | (253,200) | (6,073,900) | (1,296,000) | (1,335,100) | |
| Cash-flow-statement-based aggregate accruals | 8,289,900) | (460,400) | 5,498,500) | 1,602,100) | 849,400) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 40.40% | -2.37% | 32.54% | 12.15% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Apple Inc. | 0.00% | 4.86% | -20.46% | — | — | |
| Arista Networks Inc. | 52.90% | 147.50% | — | — | — | |
| Cisco Systems Inc. | -10.18% | 1.64% | -32.20% | — | — | |
| Dell Technologies Inc. | -20.97% | -17.42% | — | — | — | |
| Super Micro Computer Inc. | 56.84% | 5.08% | 19.76% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Technology Hardware & Equipment | -4.10% | -0.72% | -32.83% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 2.90% | 8.62% | -15.22% | — | — | |
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 × 8,289,900 ÷ [(21,906,700 + 19,134,100) ÷ 2] = 40.40%
2 Click competitor name to see calculations.
The data reveals notable fluctuations and trends in the financial reporting quality indicators over the four-year period.
- Net Operating Assets
- The net operating assets exhibited a generally increasing trend from 2019 to 2022. Starting at approximately 14.06 billion US dollars in 2019, the figure rose significantly to nearly 19.74 billion in 2020. Although there was a slight decline to around 19.13 billion in 2021, the value increased again to approximately 21.91 billion by the end of 2022. This overall upward movement suggests growth in the company's investment in operating assets over the period analyzed.
- Cash-Flow-Statement-Based Aggregate Accruals
- There is considerable volatility in aggregate accruals throughout the four years. The accruals rose from about 1.6 billion US dollars in 2019 to 5.5 billion in 2020, indicating an expansion in non-cash working capital or timing differences between earnings and cash flows. However, in 2021, aggregate accruals turned negative at around -460 million US dollars, reflecting a possible reversal or correction of previous accruals. This was followed by a sharp increase in 2022 to approximately 8.29 billion US dollars, the highest within the period, signaling increased accrual activity or changes in accrual policies.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, expressing aggregate accruals as a percentage of net operating assets, mirrored the volatility seen in aggregate accruals. It increased markedly from 12.15% in 2019 to 32.54% in 2020, indicating a larger proportion of accruals relative to operating assets. In 2021, the ratio dropped into negative territory at -2.37%, consistent with the negative aggregate accruals, suggesting a significant shift in accrual composition or timing. By 2022, the ratio reached 40.4%, its highest point, which could indicate more aggressive accrual accounting or timing differences affecting earnings.
Overall, the data points to growing net operating assets combined with substantial variability in accruals and accrual ratios. The fluctuations in accruals imply changing dynamics in earnings quality, timing differences between reported profits and cash flows, or accounting policy adjustments over time, necessitating closer examination for assessment of financial statement reliability.