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% | — | — | — | |
| Analog Devices Inc. | 0.03% | -2.94% | 90.70% | — | — | |
| Applied Materials Inc. | 0.48% | 20.73% | 17.33% | — | — | |
| Broadcom Inc. | -1.58% | -5.37% | -8.72% | — | — | |
| Intel Corp. | 13.69% | 10.73% | — | — | — | |
| KLA Corp. | 3.95% | 21.25% | — | — | — | |
| Lam Research Corp. | 1.57% | 16.02% | — | — | — | |
| Marvell Technology Inc. | -2.15% | 75.44% | — | — | — | |
| Micron Technology Inc. | 0.78% | 12.07% | — | — | — | |
| NVIDIA Corp. | 18.88% | 28.31% | — | — | — | |
| Qualcomm Inc. | -5.53% | 68.49% | 22.56% | — | — | |
| Texas Instruments Inc. | 31.37% | 22.75% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | 5.94% | 26.65% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 8.81% | 19.09% | 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.
An analysis of financial reporting quality from 2020 through 2023 reveals a steady expansion of the operational asset base contrasted by significant volatility in aggregate accruals. While the scale of operations has grown, the proportion of earnings derived from accruals has fluctuated considerably, ending the period at its lowest level.
- Net Operating Assets Trend
- A consistent upward trajectory is observed in net operating assets, which increased from 1,184,515 thousand US dollars in 2020 to 1,706,172 thousand US dollars in 2023. This represents a steady growth in the company's investment in operating assets over the four-year duration.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals exhibit a non-linear pattern. Following a decrease from 220,897 thousand US dollars in 2020 to 121,437 thousand US dollars in 2021, there was a sharp increase to 301,072 thousand US dollars in 2022. This was followed by a substantial decline to 99,148 thousand US dollars in 2023, marking the lowest absolute accrual level in the analyzed period.
- Accruals Ratio Analysis
- The balance-sheet-based accruals ratio demonstrates a cyclical movement, mirroring the volatility of aggregate accruals. The ratio peaked at 20.57% in 2020 and 20.67% in 2022, while declining to 9.75% in 2021 and reaching a period low of 5.99% in 2023. The marked reduction in the ratio by 2023 suggests that a smaller fraction of net operating assets is comprised of non-cash accruals, which typically indicates an improvement in the quality of reported earnings and a closer alignment between accrual-based accounting and cash flow.
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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% | — | — | — | |
| Analog Devices Inc. | -0.57% | -2.54% | -11.85% | — | — | |
| Applied Materials Inc. | -2.05% | 18.18% | 14.75% | — | — | |
| Broadcom Inc. | -6.71% | -8.94% | -12.34% | — | — | |
| Intel Corp. | 11.35% | 2.75% | — | — | — | |
| KLA Corp. | 3.66% | 18.30% | — | — | — | |
| Lam Research Corp. | -1.71% | 12.43% | — | — | — | |
| Marvell Technology Inc. | -5.79% | 17.57% | — | — | — | |
| Micron Technology Inc. | -2.52% | 11.37% | — | — | — | |
| NVIDIA Corp. | -47.90% | 73.13% | — | — | — | |
| Qualcomm Inc. | -14.57% | 46.91% | 15.61% | — | — | |
| Texas Instruments Inc. | 26.35% | 28.24% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | 0.17% | 7.85% | 21.27% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 1.37% | 3.25% | 15.65% | — | — | |
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.
The financial data indicates a consistent expansion of the asset base coupled with significant volatility in the accruals component, which has stabilized over the four-year period analyzed.
- Net Operating Assets Trend
- Net operating assets exhibited a continuous upward trajectory, increasing from US$ 1,184,515 thousand in 2020 to US$ 1,706,172 thousand by 2023. This steady growth reflects a persistent expansion in the scale of operational resources.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals showed substantial fluctuations. A peak of US$ 485,006 thousand in 2020 was followed by a sharp reversal to a negative US$ 204,138 thousand in 2021. Subsequent years saw a return to positive values, although at significantly lower levels, ending at US$ 43,166 thousand in 2023.
- Accruals Ratio and Earnings Quality
- The accruals ratio experienced a marked decline from 45.16% in 2020 to 2.61% in 2023. The high initial ratio suggests a significant divergence between reported earnings and cash flow in 2020. The shift to a negative ratio in 2021 indicates a period where cash flow exceeded accrual-based earnings. The convergence toward a low positive ratio by 2023 suggests an increase in earnings quality, as reported profits have become more closely aligned with actual cash realizations.
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