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
SolarEdge 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 | 4,265,949) | 2,892,060) | 2,437,109) | 1,494,624) | 964,472) | |
| Less: Cash and cash equivalents | 783,112) | 530,089) | 827,146) | 223,901) | 191,633) | |
| Less: Marketable securities | 241,117) | 167,728) | 143,687) | 91,845) | 118,680) | |
| Operating assets | 3,241,720) | 2,194,243) | 1,466,276) | 1,178,878) | 654,159) | |
| Operating Liabilities | ||||||
| Total liabilities | 2,089,583) | 1,582,021) | 1,351,352) | 682,954) | 393,746) | |
| Less: Short-term finance lease liabilities | 3,263) | 1,875) | 1,686) | 231) | —) | |
| Less: Convertible senior notes, net | 624,451) | 621,535) | 573,350) | —) | —) | |
| Less: Long-term finance lease liabilities | 45,385) | 40,508) | 26,173) | 2,399) | —) | |
| Operating liabilities | 1,416,484) | 918,103) | 750,143) | 680,324) | 393,746) | |
| Net operating assets1 | 1,825,236) | 1,276,140) | 716,133) | 498,554) | 260,413) | |
| Balance-sheet-based aggregate accruals2 | 549,096) | 560,007) | 217,579) | 238,141) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 35.41% | 56.22% | 35.82% | 62.75% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Advanced Micro Devices Inc. | 169.75% | — | — | — | — | |
| Analog Devices Inc. | -2.94% | 90.70% | — | — | — | |
| Applied Materials Inc. | 20.73% | 17.33% | — | — | — | |
| Broadcom Inc. | -5.37% | -8.72% | — | — | — | |
| Intel Corp. | 10.73% | — | — | — | — | |
| KLA Corp. | 21.25% | — | — | — | — | |
| Lam Research Corp. | 16.02% | — | — | — | — | |
| Marvell Technology Inc. | 75.44% | — | — | — | — | |
| Micron Technology Inc. | 12.07% | — | — | — | — | |
| NVIDIA Corp. | 28.31% | — | — | — | — | |
| Qualcomm Inc. | 68.49% | 22.56% | — | — | — | |
| Texas Instruments Inc. | 22.75% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | 26.65% | 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
= 3,241,720 – 1,416,484 = 1,825,236
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 1,825,236 – 1,276,140 = 549,096
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 549,096 ÷ [(1,825,236 + 1,276,140) ÷ 2] = 35.41%
4 Click competitor name to see calculations.
The financial data indicates a period of significant expansion in net operating assets accompanied by substantial volatility in the balance-sheet-based accruals ratio between 2019 and 2022. While the scale of operations increased consistently, the proportion of those assets comprised of accruals fluctuated, suggesting shifts in the quality of financial reporting and the composition of the balance sheet.
- Net Operating Assets Trend
- A consistent and rapid upward trajectory is observed in net operating assets, which grew from US$ 498,554 thousand in 2019 to US$ 1,825,236 thousand by 2022. This represents a more than threefold increase over the four-year period, indicating aggressive growth in the company's operational asset base.
- Aggregate Accruals Behavior
- Balance-sheet-based aggregate accruals remained relatively stable between 2019 and 2020 before experiencing a significant increase in 2021, rising to US$ 560,007 thousand. This value remained largely plateaued into 2022 at US$ 549,096 thousand, showing that while assets continued to expand rapidly, the growth of accruals decelerated after 2021.
- Accruals Ratio Volatility
- The accruals ratio exhibits a cyclical pattern, starting at 62.75% in 2019 and dropping to 35.82% in 2020. A sharp increase to 56.22% occurred in 2021, followed by a return to 35.41% in 2022. The decrease in 2020 and 2022 suggests that the growth in net operating assets was driven more by cash-backed components than by accounting accruals during those specific periods.
The divergence between the steady growth of net operating assets and the fluctuating accruals ratio implies that the quality of earnings, as measured by the reliance on non-cash accruals, varied significantly. The reduction of the ratio to approximately 35% in 2022, despite the highest absolute level of operating assets, indicates a shift toward a more cash-intensive asset structure compared to the 2019 and 2021 peaks.
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Cash-Flow-Statement-Based Accruals Ratio
SolarEdge 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 income attributable to SolarEdge Technologies, Inc. | 93,779) | 169,170) | 140,322) | 146,549) | 128,833) | |
| Less: Net cash provided by operating activities | 31,284) | 214,129) | 222,655) | 259,000) | 189,079) | |
| Less: Net cash used in investing activities | (417,044) | (484,211) | (236,637) | (152,853) | (152,628) | |
| Cash-flow-statement-based aggregate accruals | 479,539) | 439,252) | 154,304) | 40,402) | 92,382) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 30.92% | 44.10% | 25.41% | 10.65% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Advanced Micro Devices Inc. | -15.28% | — | — | — | — | |
| Analog Devices Inc. | -2.54% | -11.85% | — | — | — | |
| Applied Materials Inc. | 18.18% | 14.75% | — | — | — | |
| Broadcom Inc. | -8.94% | -12.34% | — | — | — | |
| Intel Corp. | 2.75% | — | — | — | — | |
| KLA Corp. | 18.30% | — | — | — | — | |
| Lam Research Corp. | 12.43% | — | — | — | — | |
| Marvell Technology Inc. | 17.57% | — | — | — | — | |
| Micron Technology Inc. | 11.37% | — | — | — | — | |
| NVIDIA Corp. | 73.13% | — | — | — | — | |
| Qualcomm Inc. | 46.91% | 15.61% | — | — | — | |
| Texas Instruments Inc. | 28.24% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | 7.85% | 21.27% | — | — | — | |
| 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 × 479,539 ÷ [(1,825,236 + 1,276,140) ÷ 2] = 30.92%
2 Click competitor name to see calculations.
Between 2019 and 2022, there was a consistent and substantial increase in both net operating assets and cash-flow-statement-based aggregate accruals. This trajectory reflects a period of rapid expansion in the scale of operations, accompanied by a growing divergence between reported accounting earnings and realized cash flows.
- Net Operating Assets
- A continuous upward trend is observed, with values rising from 498,554 thousand US dollars in 2019 to 1,825,236 thousand US dollars in 2022. This represents a significant expansion of the asset base used in operations over the four-year period.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals experienced an accelerated increase, growing from 40,402 thousand US dollars in 2019 to 479,539 thousand US dollars by the end of 2022. The most pronounced increase occurred between 2020 and 2021, where accruals nearly tripled.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio demonstrated a non-linear progression, starting at 10.65% in 2019 and peaking at 44.10% in 2021. In 2022, the ratio declined to 30.92%. While the absolute value of accruals continued to rise in the final year, the growth rate of net operating assets outpaced the growth of accruals, resulting in a relative decrease in the ratio. The peak in 2021 indicates a period where a higher proportion of earnings was derived from non-cash accruals relative to the size of the operating asset base.
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