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.
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Steel Dynamics Inc. pages available for free this week:
- Common-Size Income Statement
- Common-Size Balance Sheet: Assets
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Solvency Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Common Stock Valuation Ratios
- Enterprise Value to FCFF (EV/FCFF)
- Capital Asset Pricing Model (CAPM)
- Operating Profit Margin since 2005
- Current Ratio since 2005
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Balance-Sheet-Based Accruals Ratio
Steel Dynamics Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and equivalents | ||||||
| Less: Short-term investments | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current maturities of long-term debt | ||||||
| Less: Long-term debt, excluding current maturities | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Freeport-McMoRan Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Materials | ||||||
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= – =
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
4 Click competitor name to see calculations.
- Net operating assets
- The net operating assets demonstrated an increasing trend throughout the periods analyzed. Starting from approximately 5.21 billion USD in 2018, there was a slight decline to about 5.16 billion USD in 2019. However, a notable increase followed in 2020, with the figure rising to over 6.08 billion USD, and it continued to expand significantly, reaching over 8.18 billion USD by the end of 2021. This upward trajectory indicates ongoing expansion or investment in operating assets over the four years.
- Balance-sheet-based aggregate accruals
- The balance-sheet-based aggregate accruals fluctuated considerably during the reporting periods. Initially, in 2018, accruals amounted to approximately 547 million USD, then experienced a sharp reversal in 2019 to a negative value near -51 million USD. This was followed by a robust rebound in 2020, reaching about 927 million USD, and further growth in 2021 to nearly 2.1 billion USD. The pattern suggests increasing non-cash components in earnings, which might reflect changes in accounting estimates or operational conditions.
- Balance-sheet-based accruals ratio
- The accruals ratio mirrored the volatility observed in aggregate accruals, with pronounced variation over the periods. The ratio was relatively high at 11.1% in 2018, turned negative to -0.99% in 2019, indicating a reduction in accruals relative to net operating assets, and then rose sharply to 16.49% in 2020. The upward trend intensified in 2021, reaching 29.44%. This substantial increase suggests growing reliance on accruals, which could impact the quality and sustainability of reported earnings.
Cash-Flow-Statement-Based Accruals Ratio
Steel Dynamics Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Steel Dynamics, Inc. | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash used in investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Freeport-McMoRan Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Materials | ||||||
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
2 Click competitor name to see calculations.
Over the period from December 31, 2018, to December 31, 2021, the net operating assets of the company exhibited a general upward trend. Starting at approximately 5.21 billion US dollars, the amount remained relatively stable into 2019 but then increased significantly in 2020 and 2021, reaching over 8.18 billion US dollars by the end of the period. This represents a notable growth in the scale of operating assets.
The cash-flow-statement-based aggregate accruals showed considerable volatility across the four years. The aggregate accruals were positive and substantial in 2018 at approximately 738 million US dollars but shifted to a negative figure of approximately -148 million in 2019. Subsequently, the values rebounded to positive amounts in 2020 and 2021, growing substantially to over 2 billion US dollars in the final year. This pattern indicates fluctuations in the quality of earnings and accrual adjustments over time.
The cash-flow-statement-based accruals ratio, which expresses aggregate accruals as a percentage of net operating assets, similarly reflected this volatility and underlying change in the relationship between accruals and assets. Beginning at nearly 15% in 2018, the ratio turned negative (-2.87%) in 2019, before increasing again to near 10% in 2020 and sharply rising to over 28% by 2021. The significant increase in this ratio in the latter years suggests an intensification in the extent of accruals relative to the size of operating assets, which may imply greater non-cash components affecting earnings quality.
Overall, the data reveals a dynamic environment with fluctuating accruals and a steadily growing asset base. The marked rise in accruals and their ratio to net operating assets in recent years might warrant further investigation into the components driving these accrual changes and their potential effects on the sustainability and reliability of reported earnings.