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
Teradyne Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 3,486,824) | 3,501,252) | 3,809,425) | 3,652,346) | 2,787,014) | |
| Less: Cash and cash equivalents | 757,571) | 854,773) | 1,122,199) | 914,121) | 773,924) | |
| Less: Marketable securities | 62,154) | 39,612) | 244,231) | 522,280) | 137,303) | |
| Operating assets | 2,667,099) | 2,606,867) | 2,442,995) | 2,215,945) | 1,875,787) | |
| Operating Liabilities | ||||||
| Total liabilities | 960,927) | 1,049,958) | 1,245,469) | 1,441,541) | 1,306,856) | |
| Less: Current debt | —) | 50,115) | 19,182) | 33,343) | —) | |
| Less: Long-term debt | —) | —) | 89,244) | 376,768) | 394,687) | |
| Operating liabilities | 960,927) | 999,843) | 1,137,043) | 1,031,430) | 912,169) | |
| Net operating assets1 | 1,706,172) | 1,607,024) | 1,305,952) | 1,184,515) | 963,618) | |
| Balance-sheet-based aggregate accruals2 | 99,148) | 301,072) | 121,437) | 220,897) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 5.99% | 20.67% | 9.75% | 20.57% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Advanced Micro Devices Inc. | 2.36% | 169.75% | 8.05% | — | — | |
| Analog Devices Inc. | 0.03% | -2.94% | 90.70% | -2.85% | — | |
| Applied Materials Inc. | 0.48% | 20.73% | 17.33% | 3.75% | — | |
| Broadcom Inc. | -1.58% | -5.37% | -8.72% | 8.42% | — | |
| Intel Corp. | 13.69% | 10.73% | 11.61% | — | — | |
| KLA Corp. | 3.95% | 21.25% | 3.62% | — | — | |
| Lam Research Corp. | 1.57% | 16.02% | 8.38% | — | — | |
| Micron Technology Inc. | 0.78% | 12.07% | 11.51% | 7.56% | — | |
| NVIDIA Corp. | 18.88% | 28.31% | 115.40% | — | — | |
| Qualcomm Inc. | -5.53% | 68.49% | 22.56% | 20.94% | — | |
| Texas Instruments Inc. | 31.37% | 22.75% | 18.48% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | 6.33% | 24.66% | 19.53% | 200.00% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 8.97% | 18.09% | 19.19% | 200.00% | — | |
Based on: 10-K (reporting date: 2023-12-31), 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).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 2,667,099 – 960,927 = 1,706,172
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 1,706,172 – 1,607,024 = 99,148
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 99,148 ÷ [(1,706,172 + 1,607,024) ÷ 2] = 5.99%
4 Click competitor name to see calculations.
The financial reporting quality measures for Teradyne Inc. indicate varying trends across the analyzed periods.
- Net Operating Assets
- There is a clear upward trend in net operating assets, increasing steadily from approximately $1.18 billion to $1.71 billion over the four-year span. This growth suggests an expansion of the operating asset base, potentially reflecting increased investment or business activity.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals exhibit notable fluctuations. After a decrease from roughly $221 million in 2020 to $121 million in 2021, there was a significant rise to about $301 million in 2022, followed by another decline to around $99 million in 2023. These variations could indicate changes in accrual accounting policies, operational timing differences, or fluctuations in working capital components.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, which measures aggregate accruals relative to net operating assets, mirrors the pattern seen in aggregate accruals. It dropped from approximately 20.57% in 2020 to 9.75% in 2021, spiked back to 20.67% in 2022, and fell again to 5.99% in 2023. The ratio's volatility suggests irregularities or shifts in the accrual portion of earnings compared to operating assets, which may impact the quality and predictability of earnings.
Cash-Flow-Statement-Based Accruals Ratio
Teradyne Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Net income | 448,752) | 715,501) | 1,014,589) | 784,147) | 467,468) | |
| Less: Net cash provided by operating activities | 585,231) | 577,923) | 1,098,366) | 868,935) | 578,750) | |
| Less: Net cash (used for) provided by investing activities | (179,645) | 43,751) | 120,361) | (569,794) | (156,660) | |
| Cash-flow-statement-based aggregate accruals | 43,166) | 93,827) | (204,138) | 485,006) | 45,378) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 2.61% | 6.44% | -16.39% | 45.16% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Advanced Micro Devices Inc. | 1.17% | -15.28% | 8.10% | — | — | |
| Analog Devices Inc. | -0.57% | -2.54% | -11.85% | -3.72% | — | |
| Applied Materials Inc. | -2.05% | 18.18% | 14.75% | -0.54% | — | |
| Broadcom Inc. | -6.71% | -8.94% | -12.34% | 3.65% | — | |
| Intel Corp. | 11.35% | 2.75% | 15.15% | — | — | |
| KLA Corp. | 3.66% | 18.30% | 9.27% | — | — | |
| Lam Research Corp. | -1.71% | 12.43% | 3.89% | — | — | |
| Micron Technology Inc. | -2.52% | 11.37% | 10.01% | 5.45% | — | |
| NVIDIA Corp. | -47.90% | 73.13% | 233.25% | — | — | |
| Qualcomm Inc. | -14.57% | 46.91% | 15.61% | 48.48% | — | |
| Texas Instruments Inc. | 26.35% | 28.24% | 29.95% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | 0.45% | 7.45% | 12.36% | 7.12% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 1.47% | 2.90% | 8.62% | -15.22% | — | |
Based on: 10-K (reporting date: 2023-12-31), 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).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 43,166 ÷ [(1,706,172 + 1,607,024) ÷ 2] = 2.61%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets show a consistent upward trend over the four-year period. Starting at approximately 1.18 billion US dollars in 2020, the value increases to about 1.31 billion in 2021, followed by a more significant rise to roughly 1.61 billion in 2022, and reaching approximately 1.71 billion in 2023. This steady growth indicates expansion or increased investment in operating assets over the years.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals exhibit notable fluctuations. In 2020, the figure is positive, around 485 million US dollars, then sharply declines to a negative value of approximately -204 million in 2021, suggesting a reduction in accruals or adjustments reducing reported earnings. This is followed by a recovery to a positive 93.8 million in 2022 and further decrease to 43.2 million in 2023, indicating variability in accrual components relative to net operating assets and possible changes in earnings quality or timing differences in revenue and expense recognition.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrors the high variability seen in aggregate accruals. It begins at a significant positive level of 45.16% in 2020, sharply decreases to -16.39% in 2021, then returns to positive at 6.44% in 2022, and declines slightly to 2.61% in 2023. The positive percentages in 2020, 2022, and 2023 imply that accruals contributed positively to operating assets relative to cash flows, whereas the negative ratio in 2021 suggests the opposite, potentially indicating earnings management or unusual accruals during that year.
- Overall Insights
- The data reveal growing net operating assets over the years, signaling expansion or asset accumulation. However, the considerable volatility in aggregate accruals and their ratio indicates fluctuations in financial reporting quality or earnings management tendencies. The significant negative accruals ratio in 2021 could imply an outlier year with possible adjustments or lower earnings quality. The general reduction of the accruals ratio from the high in 2020 to relatively modest positive values by 2023 might suggest efforts toward more conservative or stable accrual accounting practices in recent years.