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
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 | 15,456,522) | 10,974,118) | 10,450,946) | 9,860,863) | 7,581,674) | |
| Less: Cash and cash equivalents | 1,499,142) | 439,272) | 746,724) | 613,110) | 555,320) | |
| Operating assets | 13,957,380) | 10,534,846) | 9,704,222) | 9,247,753) | 7,026,354) | |
| Operating Liabilities | ||||||
| Total liabilities | 7,265,675) | 5,168,511) | 5,982,352) | 5,767,283) | 3,822,566) | |
| Less: Current portion of long-term debt | 2,128) | 389,920) | 804,677) | 187,336) | 307,294) | |
| Less: Long-term debt, excluding current portion | 3,214,972) | 2,004,319) | 2,767,381) | 2,862,921) | 1,397,916) | |
| Operating liabilities | 4,048,575) | 2,774,272) | 2,410,294) | 2,717,026) | 2,117,356) | |
| Net operating assets1 | 9,908,805) | 7,760,574) | 7,293,928) | 6,530,727) | 4,908,998) | |
| Balance-sheet-based aggregate accruals2 | 2,148,231) | 466,646) | 763,201) | 1,621,729) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 24.32% | 6.20% | 11.04% | 28.35% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Linde plc | -5.37% | — | — | — | — | |
| Sherwin-Williams Co. | 12.51% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Chemicals | -2.04% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Materials | 1.53% | 200.00% | — | — | — | |
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
= 13,957,380 – 4,048,575 = 9,908,805
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 9,908,805 – 7,760,574 = 2,148,231
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,148,231 ÷ [(9,908,805 + 7,760,574) ÷ 2] = 24.32%
4 Click competitor name to see calculations.
The analysis of financial reporting quality from 2019 to 2022 reveals significant volatility in the relationship between net operating assets and aggregate accruals. While the underlying asset base grew consistently throughout the period, the accruals ratio experienced a sharp contraction followed by a rapid expansion, indicating fluctuating levels of divergence between reported earnings and cash flows.
- Net Operating Assets Trend
- A consistent upward trajectory is observed in net operating assets, which grew from US$ 6,530,727 thousand in 2019 to US$ 9,908,805 thousand by 2022. The most substantial increase occurred between 2021 and 2022, representing a significant expansion of the operating balance sheet.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals demonstrated a marked decline during the first three years of the period, falling from US$ 1,621,729 thousand in 2019 to a low of US$ 466,646 thousand in 2021. This downward trend was abruptly reversed in 2022, with accruals surging to US$ 2,148,231 thousand, the highest absolute value in the analyzed timeframe.
- Accruals Ratio Analysis
- The balance-sheet-based accruals ratio followed a U-shaped pattern, starting at 28.35% in 2019 and reaching a minimum of 6.20% in 2021. This decline suggested a period of high earnings quality where accruals played a smaller role relative to assets. However, the ratio returned to a high level of 24.32% in 2022, signaling a renewed divergence between accounting earnings and cash-based measures, which may indicate a shift in the composition of operating assets or a change in reporting dynamics.
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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 | 2,689,816) | 123,672) | 375,764) | 533,228) | 693,562) | |
| Less: Net cash provided by operating activities | 1,907,849) | 344,257) | 798,914) | 719,374) | 546,165) | |
| Less: Net cash used in investing activities | (1,422,649) | (666,590) | (863,573) | (1,663,625) | (303,695) | |
| Cash-flow-statement-based aggregate accruals | 2,204,616) | 446,005) | 440,423) | 1,477,479) | 451,092) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 24.95% | 5.93% | 6.37% | 25.83% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Linde plc | -2.93% | — | — | — | — | |
| Sherwin-Williams Co. | 13.47% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Chemicals | 0.12% | -8.12% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Materials | 1.97% | -9.09% | — | — | — | |
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 × 2,204,616 ÷ [(9,908,805 + 7,760,574) ÷ 2] = 24.95%
2 Click competitor name to see calculations.
Analysis of the cash-flow-statement-based accruals indicates a volatile relationship between reported earnings and cash flow from 2019 through 2022. While net operating assets expanded consistently throughout the period, the accruals ratio exhibited a U-shaped trend, suggesting fluctuations in the composition of reported earnings relative to cash flow.
- Net Operating Assets Growth
- Net operating assets demonstrated a continuous upward trajectory, increasing from 6.53 billion US$ in 2019 to 9.91 billion US$ by the end of 2022. The growth was steady between 2019 and 2021, followed by a significant acceleration in 2022, where assets grew by approximately 27.7% over the previous year.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals experienced substantial variance. A high of 1.48 billion US$ in 2019 was followed by a sharp decline to 440.42 million US$ in 2020. Accruals remained stable at 446.01 million US$ in 2021 before spiking to 2.20 billion US$ in 2022, representing the highest absolute accrual level in the four-year sequence.
- Accruals Ratio and Reporting Quality
- The accruals ratio exhibited a cyclical pattern, starting at 25.83% in 2019, decreasing to 6.37% in 2020 and 5.93% in 2021, and returning to 24.95% in 2022. The low ratios in 2020 and 2021 indicate a period where reported earnings were more closely aligned with cash flows. Conversely, the return to a high ratio in 2022 suggests a significant increase in non-cash earnings components relative to the asset base, mirroring the financial reporting profile seen at the start of the period.
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