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.
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Albemarle Corp. pages available for free this week:
- Statement of Comprehensive Income
- Common-Size Income Statement
- Common-Size Balance Sheet: Assets
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Short-term (Operating) Activity Ratios
- Dividend Discount Model (DDM)
- Total Asset Turnover since 2005
- Price to Earnings (P/E) since 2005
- Price to Book Value (P/BV) since 2005
- Analysis of Revenues
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Balance-Sheet-Based Accruals Ratio
Albemarle Corp., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current portion of long-term debt | ||||||
| Less: Long-term debt, excluding current portion | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Linde plc | ||||||
| Sherwin-Williams Co. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Chemicals | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Materials | ||||||
Based on: 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), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= – =
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
4 Click competitor name to see calculations.
The analysis of the financial reporting quality measures over the four-year period reveals the following patterns and trends:
- Net Operating Assets
- There is a consistent upward trend in net operating assets from 2019 through 2022. The value increased from approximately 6.53 billion US dollars in 2019 to about 9.91 billion US dollars in 2022. This represents a notable expansion of approximately 52% over the four-year span, indicating growth in asset base used for operations.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals exhibit a fluctuating pattern. Starting at about 1.62 billion US dollars in 2019, the figure significantly decreased in 2020 and 2021 to 763 million and 467 million respectively. However, in 2022, there is a sharp increase, with accruals rising to approximately 2.15 billion US dollars, the highest in the reported period. This volatility in accruals reflects changes in non-cash components or adjustments that may affect reported earnings quality.
- Balance-sheet-based Accruals Ratio
- The accruals ratio follows a pattern similar to aggregate accruals. It starts at a high of 28.35% in 2019, markedly drops to 11.04% in 2020 and further declines to 6.2% in 2021, suggesting an improvement in earnings quality due to lower accruals relative to net operating assets. However, there is a considerable increase to 24.32% in 2022, indicating a reversal and potential deterioration in reporting quality or increased earnings management through accruals.
In summary, while net operating assets have grown steadily, the fluctuations in both aggregate accruals and their ratio highlight periods of varying earnings quality, with a marked deterioration in 2022 after improvements in the prior two years. This suggests that despite asset growth, attention should be paid to the increased accruals in the most recent period, which might impact the sustainability and reliability of reported earnings.
Cash-Flow-Statement-Based Accruals Ratio
Albemarle Corp., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Albemarle Corporation | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash used in investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Linde plc | ||||||
| Sherwin-Williams Co. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Chemicals | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Materials | ||||||
Based on: 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), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets consistently increased over the four-year period. Starting from approximately 6.53 billion US dollars at the end of 2019, this figure rose to around 7.29 billion in 2020, then to 7.76 billion in 2021, and reached nearly 9.91 billion by the end of 2022. This steady upward trend indicates growth in the company's investment in operating assets.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals showed significant fluctuations during the observed years. The value decreased sharply from about 1.48 billion US dollars in 2019 to 440 million in 2020 and remained relatively stable in 2021 at approximately 446 million. However, in 2022 there was a substantial increase, with accruals reaching around 2.20 billion, surpassing the 2019 level. This indicates variability in the company's accrual accounting components affecting cash flow.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, followed a similar pattern to aggregate accruals. It declined markedly from 25.83% in 2019 to 6.37% in 2020 and slightly decreased further to 5.93% in 2021. In 2022, the ratio surged back to 24.95%, close to the initial 2019 level. This suggests that accruals as a proportion of operating assets varied considerably, reflecting changes in the quality or composition of earnings relative to cash flows over time.