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
Trade Desk Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 6,111,951) | 4,888,687) | 4,380,679) | 3,577,340) | 2,753,645) | |
| Less: Cash and cash equivalents | 1,369,463) | 895,129) | 1,030,506) | 754,154) | 437,353) | |
| Less: Short-term investments, net | 552,026) | 485,159) | 416,080) | 204,625) | 186,685) | |
| Operating assets | 4,190,462) | 3,508,399) | 2,934,093) | 2,618,561) | 2,129,607) | |
| Operating Liabilities | ||||||
| Total liabilities | 3,162,806) | 2,724,468) | 2,265,340) | 2,050,034) | 1,740,500) | |
| Operating liabilities | 3,162,806) | 2,724,468) | 2,265,340) | 2,050,034) | 1,740,500) | |
| Net operating assets1 | 1,027,656) | 783,931) | 668,753) | 568,527) | 389,107) | |
| Balance-sheet-based aggregate accruals2 | 243,725) | 115,178) | 100,226) | 179,420) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 26.91% | 15.86% | 16.20% | 37.47% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Alphabet Inc. | 26.92% | 17.24% | 21.43% | 22.86% | — | |
| Comcast Corp. | 2.10% | 1.29% | -6.76% | -0.48% | — | |
| Meta Platforms Inc. | 22.82% | 11.12% | 20.95% | 14.69% | — | |
| Netflix Inc. | 9.36% | -3.78% | 14.21% | 27.24% | — | |
| Walt Disney Co. | 0.01% | 0.08% | 3.09% | 1.73% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | 13.42% | 6.82% | 7.78% | 8.33% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Communication Services | 6.15% | 4.26% | -3.76% | 10.24% | — | |
Based on: 10-K (reporting date: 2024-12-31), 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).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 4,190,462 – 3,162,806 = 1,027,656
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 1,027,656 – 783,931 = 243,725
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 243,725 ÷ [(1,027,656 + 783,931) ÷ 2] = 26.91%
4 Click competitor name to see calculations.
The data reveals significant trends in the financial reporting quality measures over the four-year period ending December 31, 2024.
- Net Operating Assets
- This metric shows a consistent and considerable increase year over year. Starting at 568,527 thousand US dollars in 2021, it rose to 668,753 thousand in 2022, then to 783,931 thousand in 2023, and reached 1,027,656 thousand by the end of 2024. This steady growth indicates an expansion in the company's net operating assets, reflecting potentially increased operational scale or asset investments.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals exhibit a fluctuating pattern. There is a sharp decline from 179,420 thousand US dollars in 2021 to 100,226 thousand in 2022, followed by a moderate increase to 115,178 thousand in 2023. However, in 2024, the accruals more than double to 243,725 thousand. This notable rise in the final year suggests increased adjustments or estimations affecting the balance sheet, which may warrant further examination regarding earnings management or changes in accounting policies.
- Balance-sheet-based Accruals Ratio
- The accruals ratio decreases substantially from 37.47% in 2021 to approximately 16.2% in 2022, remaining relatively stable into 2023 at 15.86%. A sharp uptick occurs in 2024, with the ratio climbing to 26.91%. This ratio’s fluctuation mirrors the aggregate accruals behavior relative to net operating assets, indicating an increased proportion of accruals within the asset base in 2024 compared to the prior two years. The lower ratios in 2022 and 2023 suggest improved financial reporting quality or reduced reliance on accruals during that period, while the increase in 2024 may indicate a reversal of that trend.
Overall, the progression of net operating assets points to expansion, while the accrual figures and their ratio reveal variability in accrual-based adjustments, culminating in a significant increase in 2024. This pattern could imply a change in financial reporting or operational circumstances affecting the company's financial quality measures.
Cash-Flow-Statement-Based Accruals Ratio
Trade Desk Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net income | 393,076) | 178,940) | 53,385) | 137,762) | 242,317) | |
| Less: Net cash provided by operating activities | 739,456) | 598,322) | 548,734) | 378,513) | 405,069) | |
| Less: Net cash used in investing activities | (157,513) | (107,593) | (304,374) | (93,638) | (143,271) | |
| Cash-flow-statement-based aggregate accruals | (188,867) | (311,789) | (190,975) | (147,113) | (19,481) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -20.85% | -42.93% | -30.87% | -30.72% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Alphabet Inc. | 9.42% | -0.52% | -7.90% | 17.48% | — | |
| Comcast Corp. | 2.38% | -3.44% | -3.88% | -0.83% | — | |
| Meta Platforms Inc. | 15.08% | -7.43% | 1.96% | -14.89% | — | |
| Netflix Inc. | 12.03% | -8.44% | 16.73% | 27.32% | — | |
| Walt Disney Co. | -1.46% | -1.97% | 1.50% | -0.29% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Media & Entertainment | 6.38% | -3.21% | -1.72% | 2.46% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Communication Services | 2.36% | -2.49% | -1.32% | 6.77% | — | |
Based on: 10-K (reporting date: 2024-12-31), 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).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -188,867 ÷ [(1,027,656 + 783,931) ÷ 2] = -20.85%
2 Click competitor name to see calculations.
- Net Operating Assets
- There is a consistent upward trend in net operating assets over the four years. The value increases from 568,527 thousand US dollars in 2021 to 1,027,656 thousand US dollars in 2024. This represents an overall growth of approximately 80.7% over the period, indicating a steady expansion in the company’s operating asset base.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals show a generally negative trend throughout the years, reflecting deductions from cash flows. They deepen significantly from -147,113 thousand US dollars in 2021 to -311,789 thousand US dollars in 2023, before partially recovering to -188,867 thousand US dollars in 2024. This pattern suggests increasing levels of non-cash adjustments until 2023, followed by a reduction in the magnitude of accruals in the most recent year.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, expressed as a percentage, follows a variable pattern. It starts at -30.72% in 2021, decreases marginally to -30.87% in 2022, then falls substantially to -42.93% in 2023 indicating a higher proportion of accruals relative to net operating assets. This ratio improves to -20.85% in 2024, suggesting a reduction in accruals intensity relative to the asset base. The fluctuations in the ratio imply changes in earnings quality, with 2023 marking the lowest point regarding accrual-based adjustments.
- Overall Analysis
- The increase in net operating assets combined with the volatile pattern in accruals and the accruals ratio suggests variable earnings quality over the period. The sharp rise in aggregate accruals and the peak negative ratio in 2023 may be indicative of higher earnings manipulation risk or lower earnings quality in that year. The subsequent improvement in 2024 points to a possible stabilization or improvement in financial reporting quality.