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
Amphenol Corp., 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 | 16,526,400) | 15,326,200) | 14,678,400) | 12,327,300) | 10,815,500) | |
| Less: Cash and cash equivalents | 1,475,000) | 1,373,100) | 1,197,100) | 1,702,000) | 891,200) | |
| Less: Short-term investments | 185,200) | 61,100) | 44,300) | 36,100) | 17,400) | |
| Operating assets | 14,866,200) | 13,892,000) | 13,437,000) | 10,589,200) | 9,906,900) | |
| Operating Liabilities | ||||||
| Total liabilities | 8,099,900) | 8,232,100) | 8,299,300) | 6,875,400) | 6,219,300) | |
| Less: Current portion of long-term debt | 353,800) | 2,700) | 4,000) | 230,300) | 403,300) | |
| Less: Long-term debt, less current portion | 3,983,500) | 4,575,000) | 4,795,900) | 3,636,200) | 3,203,400) | |
| Operating liabilities | 3,762,600) | 3,654,400) | 3,499,400) | 3,008,900) | 2,612,600) | |
| Net operating assets1 | 11,103,600) | 10,237,600) | 9,937,600) | 7,580,300) | 7,294,300) | |
| Balance-sheet-based aggregate accruals2 | 866,000) | 300,000) | 2,357,300) | 286,000) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 8.12% | 2.97% | 26.91% | 3.85% | — | |
| 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: 2023-12-31), 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
= 14,866,200 – 3,762,600 = 11,103,600
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 11,103,600 – 10,237,600 = 866,000
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 866,000 ÷ [(11,103,600 + 10,237,600) ÷ 2] = 8.12%
4 Click competitor name to see calculations.
The financial data reveals a consistent expansion of net operating assets alongside significant volatility in aggregate accruals between 2020 and 2023. While the asset base grew steadily, the accruals ratio exhibited a sharp anomaly in 2021 before stabilizing in subsequent periods.
- Net Operating Assets Growth
- Net operating assets demonstrated a continuous upward trend over the four-year period, increasing from 7,580,300 thousand US dollars in 2020 to 11,103,600 thousand US dollars by the end of 2023. This represents a steady expansion of the company's operating resource base, with the most significant year-over-year growth occurring between 2020 and 2021.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals fluctuated considerably. A substantial spike occurred in 2021, where accruals reached 2,357,300 thousand US dollars, compared to 286,000 thousand US dollars in 2020. This peak was followed by a sharp contraction to 300,000 thousand US dollars in 2022, before rising again to 866,000 thousand US dollars in 2023.
- Accruals Ratio and Reporting Quality
- The balance-sheet-based accruals ratio mirrored the volatility of aggregate accruals. The ratio surged to 26.91% in 2021, indicating a period where a significant portion of the operating assets was composed of accruals rather than cash-backed items, which typically suggests a temporary decline in earnings quality. The ratio subsequently normalized to 2.97% in 2022, suggesting a correction of the 2021 accrual build-up. In 2023, the ratio increased to 8.12%, reflecting a moderate rise in the proportion of accruals relative to net operating assets.
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Cash-Flow-Statement-Based Accruals Ratio
Amphenol Corp., 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 attributable to Amphenol Corporation | 1,928,000) | 1,902,300) | 1,590,800) | 1,203,400) | 1,155,000) | |
| Less: Net cash provided by operating activities | 2,528,700) | 2,174,600) | 1,523,900) | 1,592,000) | 1,502,300) | |
| Less: Net cash used in investing activities | (1,393,700) | (731,100) | (2,604,400) | (333,500) | (1,228,800) | |
| Cash-flow-statement-based aggregate accruals | 793,000) | 458,800) | 2,671,300) | (55,100) | 881,500) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 7.43% | 4.55% | 30.50% | -0.74% | — | |
| 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: 2023-12-31), 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 × 793,000 ÷ [(11,103,600 + 10,237,600) ÷ 2] = 7.43%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality reveals a consistent expansion in the operational asset base coupled with significant volatility in aggregate accruals between 2020 and 2023.
- Net Operating Assets Trend
- A steady upward trajectory is observed in net operating assets, which increased from US$ 7,580,300 thousand in 2020 to US$ 11,103,600 thousand by the end of 2023. This represents a continuous growth in the scale of the company's operational investments over the analyzed period.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals exhibited extreme fluctuations. Following a negligible negative value of US$ 55,100 thousand in 2020, accruals surged to US$ 2,671,300 thousand in 2021. A substantial correction occurred in 2022, with values dropping to US$ 458,800 thousand, before moderating to US$ 793,000 thousand in 2023.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio indicates a period of significant divergence between accrual-based earnings and cash flows in 2021. The ratio moved from -0.74% in 2020 to a peak of 30.50% in 2021, suggesting a temporary decrease in the quality of earnings as a larger portion of profits was not backed by cash. However, the metric stabilized in the following years, falling to 4.55% in 2022 and slightly increasing to 7.43% in 2023, indicating a return to a more normalized relationship between reported earnings and cash flow.
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