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% | — | — | — | — | |
| Arista Networks Inc. | 106.22% | — | — | — | — | |
| Cisco Systems Inc. | 5.96% | — | — | — | — | |
| Dell Technologies Inc. | -89.81% | — | — | — | — | |
| Lumentum Holdings Inc. | -0.44% | — | — | — | — | |
| Super Micro Computer Inc. | 58.35% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Technology Hardware & Equipment | -13.26% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 19.09% | 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.
An evaluation of the financial reporting quality indicates significant volatility in the accruals profile between 2019 and 2022. While net operating assets demonstrated a general growth trend, the balance-sheet-based accruals exhibited sharp fluctuations, impacting the assessment of earnings quality and the relationship between reported profits and cash flow.
- Net Operating Assets Evolution
- Net operating assets expanded from 14.06 billion USD in 2019 to 21.91 billion USD by the end of 2022. The most significant increase occurred between 2019 and 2020, followed by a slight contraction in 2021 and a renewed upward trajectory in 2022. This overall expansion suggests an increase in the scale of the operational asset base over the four-year period.
- Aggregate Accruals Volatility
- Aggregate accruals showed a highly unstable pattern, increasing sharply from 1.74 billion USD in 2019 to a peak of 5.68 billion USD in 2020. This was followed by a dramatic reversal in 2021, where accruals became negative at 603.9 million USD, before returning to a positive 2.77 billion USD in 2022. Such wide oscillations typically indicate periods of significant divergence between accrual-based earnings and cash-based realizations.
- Accruals Ratio Interpretation
- The balance-sheet-based accruals ratio mirrors the volatility of the aggregate accruals, rising from 13.21% in 2019 to 33.62% in 2020. The 2020 peak represents a period of relatively lower earnings quality, as a higher proportion of the asset base was driven by non-cash accruals. The shift to -3.11% in 2021 suggests a period where cash flows exceeded reported earnings, potentially due to asset write-downs or significant working capital collections. By 2022, the ratio returned to 13.51%, effectively normalizing to levels observed at the start of the analysis period.
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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% | — | — | — | — | |
| Arista Networks Inc. | 52.90% | — | — | — | — | |
| Cisco Systems Inc. | -10.18% | — | — | — | — | |
| Dell Technologies Inc. | -20.97% | — | — | — | — | |
| Lumentum Holdings Inc. | -2.83% | — | — | — | — | |
| Super Micro Computer Inc. | 56.84% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Technology Hardware & Equipment | -4.09% | -1.64% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 3.25% | 15.65% | — | — | — | |
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 financial reporting quality over the period from 2019 to 2022 is characterized by significant volatility in accruals relative to the operating asset base. While the company expanded its net operating assets, the relationship between cash flow and reported earnings shifted inconsistently.
- Net Operating Asset Growth
- Net operating assets exhibited a general upward trend, growing from 14.06 billion USD in 2019 to 21.91 billion USD in 2022. A slight contraction occurred in 2021, but the overall trajectory indicates a broadening of the company's operating resource base.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals showed extreme fluctuations throughout the period. Accruals increased from 1.60 billion USD in 2019 to 5.50 billion USD in 2020, before dropping to a negative 460.4 million USD in 2021. By 2022, accruals spiked to a period high of 8.29 billion USD, indicating a substantial divergence between accrual-based accounting and actual cash flow realizations.
- Accruals Ratio Interpretation
- The cash-flow-statement-based accruals ratio reflected this instability, moving from 12.15% in 2019 to 32.54% in 2020. The ratio inverted to -2.37% in 2021, suggesting a period where cash flows exceeded accrual earnings. However, the ratio rose sharply to 40.40% in 2022. Such a high ratio suggests that a significant portion of the earnings is comprised of non-cash accruals relative to net operating assets, which typically indicates a decrease in the quality of earnings for that specific period.
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