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
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 | 12,531,234) | 9,265,562) | 8,275,765) | 7,703,563) | 6,855,732) | |
| Less: Cash and equivalents | 1,243,868) | 1,368,618) | 1,381,460) | 828,220) | 1,028,649) | |
| Less: Short-term investments | —) | —) | 262,174) | 228,783) | —) | |
| Operating assets | 11,287,366) | 7,896,944) | 6,632,131) | 6,646,560) | 5,827,083) | |
| Operating Liabilities | ||||||
| Total liabilities | 6,211,063) | 4,917,336) | 4,210,910) | 3,816,334) | 3,549,424) | |
| Less: Current maturities of long-term debt | 97,174) | 86,894) | 89,356) | 24,234) | 28,795) | |
| Less: Long-term debt, excluding current maturities | 3,008,702) | 3,015,782) | 2,644,988) | 2,352,489) | 2,353,145) | |
| Operating liabilities | 3,105,187) | 1,814,660) | 1,476,566) | 1,439,611) | 1,167,484) | |
| Net operating assets1 | 8,182,179) | 6,082,284) | 5,155,565) | 5,206,949) | 4,659,599) | |
| Balance-sheet-based aggregate accruals2 | 2,099,895) | 926,719) | (51,384) | 547,350) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 29.44% | 16.49% | -0.99% | 11.10% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Freeport-McMoRan Inc. | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Materials | 200.00% | — | — | — | — | |
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
= 11,287,366 – 3,105,187 = 8,182,179
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 8,182,179 – 6,082,284 = 2,099,895
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,099,895 ÷ [(8,182,179 + 6,082,284) ÷ 2] = 29.44%
4 Click competitor name to see calculations.
The analysis of aggregate accruals from 2018 to 2021 reveals a significant upward trajectory in both absolute accrual values and the accruals ratio, occurring alongside a steady expansion of net operating assets.
- Net Operating Assets Growth
- Net operating assets demonstrated a consistent increase, rising from US$ 5,206,949 thousand in 2018 to US$ 8,182,179 thousand in 2021. The most substantial growth occurred between 2020 and 2021, reflecting a notable expansion in the company's operating base over the observed period.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals exhibited significant fluctuation. After starting at US$ 547,350 thousand in 2018, the figure dropped to a negative US$ 51,384 thousand in 2019. This was followed by a sharp reversal, with accruals climbing to US$ 926,719 thousand in 2020 and reaching US$ 2,099,895 thousand by 2021.
- Accruals Ratio and Earnings Quality
- The balance-sheet-based accruals ratio shifted from 11.10% in 2018 to -0.99% in 2019, suggesting a period where earnings were closely aligned with cash flows. However, a steep upward trend followed, with the ratio reaching 16.49% in 2020 and 29.44% in 2021. This escalating ratio indicates that a larger proportion of reported earnings is derived from non-cash accruals rather than cash flow, which typically suggests a decrease in the quality of financial reporting and a higher risk of future earnings reversals.
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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. | 3,214,066) | 550,822) | 671,103) | 1,258,379) | 812,741) | |
| Less: Net cash provided by operating activities | 2,204,136) | 987,032) | 1,396,290) | 1,415,469) | 739,606) | |
| Less: Net cash used in investing activities | (999,420) | (993,259) | (576,686) | (895,264) | (139,105) | |
| Cash-flow-statement-based aggregate accruals | 2,009,350) | 557,049) | (148,501) | 738,174) | 212,240) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 28.17% | 9.91% | -2.87% | 14.96% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Freeport-McMoRan Inc. | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Materials | -9.09% | — | — | — | — | |
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 × 2,009,350 ÷ [(8,182,179 + 6,082,284) ÷ 2] = 28.17%
2 Click competitor name to see calculations.
The analysis of financial reporting quality from 2018 to 2021 reveals a significant increase in both net operating assets and the reliance on accruals to support reported earnings. While the period began with moderate accruals, there is a clear trend toward a widening gap between cash flow and accounting-based assets by the end of the period.
- Net Operating Assets Trend
- Net operating assets remained relatively stable between 2018 and 2019, with values of 5.21 billion USD and 5.16 billion USD, respectively. A growth phase followed, with assets increasing to 6.08 billion USD in 2020 and rising sharply to 8.18 billion USD by December 31, 2021.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals demonstrated substantial volatility. A positive balance of 738 million USD in 2018 shifted to a negative 148 million USD in 2019, signifying a period where cash flows exceeded accrual-based earnings. This trend reversed aggressively in subsequent years, with accruals increasing to 557 million USD in 2020 and peaking at 2.01 billion USD in 2021.
- Accruals Ratio Interpretation
- The accruals ratio shifted from 14.96% in 2018 to a negative 2.87% in 2019, suggesting high earnings quality during the latter year. However, the ratio climbed to 9.91% in 2020 and accelerated to 28.17% in 2021. The sharp escalation in this ratio indicates that a larger portion of the net operating assets is driven by non-cash accruals, which typically suggests a decrease in the quality of earnings as the divergence between reported profits and actual cash flow expands.
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