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
Western Digital Corp., balance sheet computation of aggregate accruals
US$ in millions
| Jun 30, 2023 | Jul 1, 2022 | Jul 2, 2021 | Jul 3, 2020 | Jun 28, 2019 | Jun 29, 2018 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 24,429) | 26,259) | 26,132) | 25,662) | 26,370) | 29,235) | |
| Less: Cash and cash equivalents | 2,023) | 2,327) | 3,370) | 3,048) | 3,455) | 5,005) | |
| Operating assets | 22,406) | 23,932) | 22,762) | 22,614) | 22,915) | 24,230) | |
| Operating Liabilities | |||||||
| Total liabilities | 12,706) | 14,038) | 15,411) | 16,111) | 16,403) | 17,704) | |
| Less: Current portion of long-term debt | 1,213) | —) | 251) | 286) | 276) | 179) | |
| Less: Long-term debt, less current portion | 5,857) | 7,022) | 8,474) | 9,289) | 10,246) | 10,993) | |
| Operating liabilities | 5,636) | 7,016) | 6,686) | 6,536) | 5,881) | 6,532) | |
| Net operating assets1 | 16,770) | 16,916) | 16,076) | 16,078) | 17,034) | 17,698) | |
| Balance-sheet-based aggregate accruals2 | (146) | 840) | (2) | (956) | (664) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | -0.87% | 5.09% | -0.01% | -5.77% | -3.82% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Apple Inc. | -9.04% | -2.12% | — | — | — | — | |
| Arista Networks Inc. | 17.14% | 106.22% | — | — | — | — | |
| Cisco Systems Inc. | -12.09% | 5.96% | — | — | — | — | |
| Dell Technologies Inc. | 12.16% | -89.81% | — | — | — | — | |
| Lumentum Holdings Inc. | 56.73% | -0.44% | — | — | — | — | |
| Super Micro Computer Inc. | 3.74% | 58.35% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Technology Hardware & Equipment | -6.32% | -13.26% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Information Technology | 8.81% | 19.09% | 200.00% | — | — | — | |
Based on: 10-K (reporting date: 2023-06-30), 10-K (reporting date: 2022-07-01), 10-K (reporting date: 2021-07-02), 10-K (reporting date: 2020-07-03), 10-K (reporting date: 2019-06-28), 10-K (reporting date: 2018-06-29).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 22,406 – 5,636 = 16,770
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 16,770 – 16,916 = -146
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -146 ÷ [(16,770 + 16,916) ÷ 2] = -0.87%
4 Click competitor name to see calculations.
The financial reporting quality over the five-year period is characterized by relative stability in operating asset规模 accompanied by significant volatility in balance-sheet-based accruals. While the underlying operating asset base remained consistent, the relationship between accrual-based earnings and cash flows fluctuated considerably, peaking in 2022.
- Net Operating Assets Trend
- Net operating assets remained relatively stable throughout the observed period, maintaining a range between US$ 16.08 billion and US$ 17.03 billion. A slight contraction occurred between 2019 and 2021, followed by a marginal recovery and stabilization at US$ 16.77 billion by June 30, 2023. This consistency suggests a steady level of capital employed in core operations.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals exhibited high volatility and frequent sign reversals. The period began with negative accruals in 2019 (-US$ 664 million) and 2020 (-US$ 956 million), indicating that cash flows from operations exceeded accrual-based net income. This trend reversed sharply, moving to a near-zero balance in 2021 and reaching a positive peak of US$ 840 million in 2022, before returning to a negative value of -US$ 146 million in 2023.
- Accruals Ratio Analysis
- The accruals ratio mirrors the volatility of the aggregate accruals, fluctuating between -5.77% and 5.09%. The negative ratios observed in 2019, 2020, and 2023 suggest a conservative earnings profile where cash generation outperformed reported accounting profits. The shift to a positive 5.09% in 2022 marks a departure from this trend, indicating a period where accruals increased relative to net operating assets. The subsequent decline to -0.87% in 2023 suggests a reversion toward a more cash-backed earnings structure.
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Cash-Flow-Statement-Based Accruals Ratio
Western Digital Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Jun 30, 2023 | Jul 1, 2022 | Jul 2, 2021 | Jul 3, 2020 | Jun 28, 2019 | Jun 29, 2018 | ||
|---|---|---|---|---|---|---|---|
| Net income (loss) | (1,706) | 1,500) | 821) | (250) | (754) | 675) | |
| Less: Net cash provided by (used in) operating activities | (408) | 1,880) | 1,898) | 824) | 1,547) | 4,205) | |
| Less: Net cash (used in) provided by investing activities | (762) | (1,192) | (765) | 278) | (1,272) | (1,655) | |
| Cash-flow-statement-based aggregate accruals | (536) | 812) | (312) | (1,352) | (1,029) | (1,875) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | -3.18% | 4.92% | -1.94% | -8.17% | -5.93% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Apple Inc. | -14.62% | 0.00% | — | — | — | — | |
| Arista Networks Inc. | 36.37% | 52.90% | — | — | — | — | |
| Cisco Systems Inc. | -7.65% | -10.18% | — | — | — | — | |
| Dell Technologies Inc. | 11.23% | -20.97% | — | — | — | — | |
| Lumentum Holdings Inc. | 33.53% | -2.83% | — | — | — | — | |
| Super Micro Computer Inc. | 0.89% | 56.84% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Technology Hardware & Equipment | -9.60% | -4.09% | -1.64% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Information Technology | 1.37% | 3.25% | 15.65% | — | — | — | |
Based on: 10-K (reporting date: 2023-06-30), 10-K (reporting date: 2022-07-01), 10-K (reporting date: 2021-07-02), 10-K (reporting date: 2020-07-03), 10-K (reporting date: 2019-06-28), 10-K (reporting date: 2018-06-29).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -536 ÷ [(16,770 + 16,916) ÷ 2] = -3.18%
2 Click competitor name to see calculations.
The analysis of financial reporting quality over the five-year period from June 2019 to June 2023 reveals a volatile relationship between accrual-based earnings and operational cash flows, despite a relatively stable base of net operating assets.
- Net Operating Assets Stability
- Net operating assets remained consistent throughout the observed period, fluctuating within a narrow range between 16.07 billion and 17.03 billion US dollars. This stability indicates that the fluctuations in the accruals ratio are driven by changes in the aggregate accruals rather than significant expansions or contractions of the company's operating asset base.
- Aggregate Accruals Trend
- Cash-flow-statement-based aggregate accruals exhibited significant variance, characterized by predominantly negative values. Negative accruals were observed in 2019, 2020, 2021, and 2023, reaching a peak negative value of 1.35 billion US dollars in July 2020. A notable reversal occurred in July 2022, when accruals shifted to a positive 812 million US dollars before returning to a negative 536 million US dollars in June 2023.
- Accruals Ratio Interpretation
- The accruals ratio followed a volatile trajectory, moving from -5.93% in 2019 to a low of -8.17% in 2020. The ratio improved toward zero in 2021 (-1.94%) and transitioned into positive territory in 2022, peaking at 4.92%. By June 2023, the ratio reverted to -3.18%. The prevalence of negative ratios suggests that for most of the period, cash flows from operations exceeded reported accrual earnings, which is typically associated with conservative accounting practices. The positive spike in 2022 represents a temporary departure from this trend, where reported earnings exceeded cash flow.
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