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
Synopsys Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Oct 31, 2024 | Oct 31, 2023 | Oct 31, 2022 | Oct 31, 2021 | Oct 31, 2020 | Oct 31, 2019 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 13,073,561) | 10,333,131) | 9,418,087) | 8,752,260) | 8,030,062) | 6,405,160) | |
| Less: Cash and cash equivalents | 3,896,532) | 1,438,913) | 1,417,608) | 1,432,840) | 1,235,653) | 728,597) | |
| Less: Short-term investments | 153,869) | 151,639) | 147,913) | 147,949) | —) | —) | |
| Operating assets | 9,023,160) | 8,742,579) | 7,852,566) | 7,171,471) | 6,794,409) | 5,676,563) | |
| Operating Liabilities | |||||||
| Total liabilities | 4,050,355) | 4,148,830) | 3,858,897) | 3,453,317) | 3,117,695) | 2,316,284) | |
| Less: Short-term debt | —) | —) | —) | 74,992) | 27,084) | 17,614) | |
| Less: Long-term debt | 15,601) | 18,078) | 20,824) | 25,094) | 100,823) | 120,093) | |
| Operating liabilities | 4,034,754) | 4,130,752) | 3,838,073) | 3,353,231) | 2,989,788) | 2,178,577) | |
| Net operating assets1 | 4,988,406) | 4,611,827) | 4,014,493) | 3,818,240) | 3,804,621) | 3,497,986) | |
| Balance-sheet-based aggregate accruals2 | 376,579) | 597,334) | 196,253) | 13,619) | 306,635) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 7.85% | 13.85% | 5.01% | 0.36% | 8.40% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Accenture PLC | 35.69% | 16.32% | 21.70% | 27.93% | 3.73% | — | |
| Adobe Inc. | -3.83% | 1.85% | -8.24% | 14.14% | 8.20% | — | |
| Cadence Design Systems Inc. | 39.84% | 11.17% | 26.65% | 4.43% | — | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | — | |
| Fair Isaac Corp. | 6.46% | 12.11% | -3.66% | -6.17% | -0.02% | — | |
| International Business Machines Corp. | 2.79% | 2.42% | 1.55% | -7.39% | — | — | |
| Intuit Inc. | 3.35% | -1.74% | 85.68% | 139.73% | -1.39% | — | |
| Microsoft Corp. | 52.18% | 22.96% | 42.27% | 40.52% | 14.41% | — | |
| Oracle Corp. | 4.30% | 51.77% | 9.90% | 5.62% | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | — | |
| Palo Alto Networks Inc. | 89.91% | 137.01% | -124.73% | 85.21% | 69.06% | — | |
| Salesforce Inc. | -2.46% | -2.30% | 57.74% | 10.87% | — | — | |
| ServiceNow Inc. | 22.91% | 61.79% | 12.89% | 34.89% | — | — | |
| Workday Inc. | 28.44% | -11.24% | 55.93% | -15.99% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Software & Services | 26.35% | 18.48% | 29.42% | 16.66% | 200.00% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Information Technology | 21.42% | 8.98% | 18.09% | 19.16% | 200.00% | — | |
Based on: 10-K (reporting date: 2024-10-31), 10-K (reporting date: 2023-10-31), 10-K (reporting date: 2022-10-31), 10-K (reporting date: 2021-10-31), 10-K (reporting date: 2020-10-31), 10-K (reporting date: 2019-10-31).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 9,023,160 – 4,034,754 = 4,988,406
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 4,988,406 – 4,611,827 = 376,579
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 376,579 ÷ [(4,988,406 + 4,611,827) ÷ 2] = 7.85%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets show a consistent upward trend over the five-year period. Starting at approximately 3.80 billion US dollars in 2020, the amount increases slightly in 2021, followed by a more pronounced growth in the subsequent years, reaching nearly 5.0 billion US dollars in 2024. This indicates an expansion in the company’s operational asset base.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals exhibit considerable volatility during the period. An initial high value in 2020 at approximately 306.6 million US dollars sharply declines in 2021 to around 13.6 million US dollars. This is followed by an increase to about 196.3 million in 2022 and a notable peak in 2023 at around 597.3 million US dollars. In 2024, the accruals decrease again to approximately 376.6 million US dollars. These fluctuations suggest variability in the non-cash elements affecting earnings, which may impact the earnings quality.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrors the behavior observed in aggregate accruals, indicating changes in the proportion of accruals relative to net operating assets. It starts at a relatively high level of 8.4% in 2020, then falls sharply to a low of 0.36% in 2021. The ratio rebounds to 5.01% in 2022 and escalates dramatically to 13.85% in 2023, before declining to 7.85% in 2024. This fluctuation points to varying degrees of earnings persistence and potential volatility in earnings quality.
- Overall Insights
- The data reveal moderate growth in net operating assets alongside significant fluctuations in both aggregate accruals and their ratio. The volatility in the accruals measures, especially the sharp increase in 2023, may indicate periods of reduced earnings quality or greater discretion in accounting estimates. Analysts should consider these variations when assessing the sustainability and reliability of earnings over the evaluated timeframe.
Cash-Flow-Statement-Based Accruals Ratio
Synopsys Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Oct 31, 2024 | Oct 31, 2023 | Oct 31, 2022 | Oct 31, 2021 | Oct 31, 2020 | Oct 31, 2019 | ||
|---|---|---|---|---|---|---|---|
| Net income attributed to Synopsys | 2,263,380) | 1,229,888) | 984,594) | 757,516) | 664,347) | 532,367) | |
| Less: Net cash provided by operating activities | 1,407,029) | 1,703,274) | 1,738,900) | 1,492,622) | 991,313) | 800,513) | |
| Less: Net cash (used in) provided by investing activities | 1,223,013) | (482,101) | (572,623) | (549,030) | (360,418) | (235,877) | |
| Cash-flow-statement-based aggregate accruals | (366,662) | 8,715) | (181,683) | (186,076) | 33,452) | (32,269) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | -7.64% | 0.20% | -4.64% | -4.88% | 0.92% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Accenture PLC | 24.31% | -0.19% | 11.87% | 11.80% | -13.65% | — | |
| Adobe Inc. | -21.90% | -21.73% | -19.93% | 9.21% | -0.48% | — | |
| Cadence Design Systems Inc. | 17.36% | 3.78% | 15.03% | -5.75% | — | — | |
| CrowdStrike Holdings Inc. | — | — | — | — | — | — | |
| Fair Isaac Corp. | -8.60% | -2.41% | -13.92% | -17.25% | -10.25% | — | |
| International Business Machines Corp. | -3.73% | 0.99% | -7.22% | -1.64% | — | — | |
| Intuit Inc. | -8.44% | -8.74% | 25.60% | 58.72% | -34.22% | — | |
| Microsoft Corp. | 30.89% | 5.22% | 13.42% | 17.68% | -8.19% | — | |
| Oracle Corp. | -1.01% | 42.79% | -30.58% | 25.81% | — | — | |
| Palantir Technologies Inc. | — | — | — | — | — | — | |
| Palo Alto Networks Inc. | 33.84% | -37.95% | -196.64% | -68.30% | -488.47% | — | |
| Salesforce Inc. | -8.44% | -8.49% | 21.96% | 10.57% | — | — | |
| ServiceNow Inc. | -7.12% | 15.44% | 8.80% | -21.14% | — | — | |
| Workday Inc. | 34.56% | 18.64% | -0.65% | -18.51% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Software & Services | 12.10% | 7.37% | 1.97% | 11.15% | -28.80% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Information Technology | 6.29% | 1.46% | 2.91% | 8.62% | -15.54% | — | |
Based on: 10-K (reporting date: 2024-10-31), 10-K (reporting date: 2023-10-31), 10-K (reporting date: 2022-10-31), 10-K (reporting date: 2021-10-31), 10-K (reporting date: 2020-10-31), 10-K (reporting date: 2019-10-31).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -366,662 ÷ [(4,988,406 + 4,611,827) ÷ 2] = -7.64%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets have exhibited a consistent upward trend over the five-year period. Starting at approximately 3.8 billion US dollars in 2020, the figure increased modestly to about 3.82 billion in 2021. This growth accelerated in the subsequent years, reaching around 4.01 billion in 2022, 4.61 billion in 2023, and peaking at nearly 5.0 billion by 2024. The steady increase suggests ongoing investments or growth in operational assets.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals based on the cash flow statement show considerable volatility during the analyzed periods. The measure started at a positive 33 thousand US dollars in 2020, turning negative in 2021 and 2022 with values around -186 thousand and -182 thousand respectively. In 2023, there was a reversal to a positive figure of 8.7 thousand, but in 2024, the aggregate accruals swung back sharply to a negative value of -367 thousand. These fluctuations indicate varying levels of accrual adjustments impacting cash flow, with a particularly notable decline in the latest year.
- Cash-flow-statement-based Accruals Ratio
- A similar pattern of variability is observed in the accruals ratio. It began at under 1% in 2020 (0.92%), dropped substantially to around -4.9% in 2021, and remained relatively stable but negative near -4.6% in 2022. In 2023, the ratio gained a slight positive foothold at 0.2%, only to plunge again to -7.64% in 2024, the lowest ratio in the period analyzed. This sharp decline reflects an increasing proportion of accruals relative to cash flows, indicating potential concerns regarding earnings quality or accrual management during the most recent year.
- Overall Observations
- The data suggests that while the company’s net operating assets have grown consistently, the quality or composition of earnings, as indicated by the accrual metrics, has been less stable. The pronounced swings in aggregate accrual amounts and their ratio to cash flow could point to fluctuating earnings management practices or variations in working capital components. The sharp negative shift in 2024 particularly flags a need for closer attention to accruals and their impact on cash flow quality.