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
Arista Networks Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 19,448,600) | 14,043,921) | 9,946,806) | 6,775,410) | 5,734,429) | |
| Less: Cash and cash equivalents | 1,963,900) | 2,762,357) | 1,938,606) | 671,707) | 620,813) | |
| Less: Marketable securities | 8,779,100) | 5,541,116) | 3,069,362) | 2,352,022) | 2,787,502) | |
| Operating assets | 8,705,600) | 5,740,448) | 4,938,838) | 3,751,681) | 2,326,114) | |
| Operating Liabilities | ||||||
| Total liabilities | 7,078,100) | 4,049,114) | 2,727,747) | 1,889,590) | 1,755,829) | |
| Operating liabilities | 7,078,100) | 4,049,114) | 2,727,747) | 1,889,590) | 1,755,829) | |
| Net operating assets1 | 1,627,500) | 1,691,334) | 2,211,091) | 1,862,091) | 570,285) | |
| Balance-sheet-based aggregate accruals2 | (63,834) | (519,757) | 349,000) | 1,291,806) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -3.85% | -26.64% | 17.14% | 106.22% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Apple Inc. | 17.98% | -12.64% | -9.04% | -2.12% | 36.09% | |
| Cisco Systems Inc. | 0.44% | 75.07% | -12.09% | 5.96% | 20.24% | |
| Dell Technologies Inc. | 18.00% | -9.55% | 12.16% | -89.81% | — | |
| Super Micro Computer Inc. | -0.54% | 105.88% | 3.74% | 58.35% | 8.42% | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Technology Hardware & Equipment | 11.90% | 11.96% | -6.96% | -13.35% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 14.51% | 21.35% | 8.92% | 18.19% | — | |
Based on: 10-K (reporting date: 2025-12-31), 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).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= 8,705,600 – 7,078,100 = 1,627,500
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= 1,627,500 – 1,691,334 = -63,834
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -63,834 ÷ [(1,627,500 + 1,691,334) ÷ 2] = -3.85%
4 Click competitor name to see calculations.
The balance-sheet-based accruals ratio exhibits a significant shift over the observed period. Initially high, the ratio declines substantially, eventually becoming negative. This suggests a changing relationship between reported net operating assets and the underlying accruals.
- Net Operating Assets
- Net operating assets increased from 1,862,091 to 2,211,091 between 2022 and 2023, representing a growth of approximately 18.7%. However, subsequent years show a decline, falling to 1,691,334 by 2024 and further to 1,627,500 by 2025. This indicates a reversal in asset growth and a potential contraction in operational scale.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals demonstrate a marked decrease over the period. Starting at 1,291,806 in 2022, they fell dramatically to 349,000 in 2023. This downward trend continued, resulting in negative accruals of -519,757 in 2024 and -63,834 in 2025. The transition to negative accruals suggests a reversal of prior accrual patterns, potentially indicating cash generation exceeding reported earnings.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio began at a high of 106.22% in 2022, indicating that accruals were substantial relative to net operating assets. A significant decrease was observed in 2023, with the ratio falling to 17.14%. This decline accelerated in 2024, resulting in a negative ratio of -26.64%, and continued to -3.85% in 2025. The negative ratios in the later years suggest that cash flows from operations are not fully captured in reported earnings, or that prior accruals are being reversed. The magnitude of the shift warrants further investigation into the underlying drivers of these accruals.
The combined trends suggest a potential shift in the company’s financial reporting characteristics. The initial high accruals ratio, followed by a substantial decline and eventual negativity, could indicate a change in accounting practices, operational performance, or a combination of both. The decreasing net operating assets alongside declining accruals require further scrutiny to assess the sustainability of reported earnings and the quality of financial reporting.
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Cash-Flow-Statement-Based Accruals Ratio
Arista Networks Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net income | 3,511,400) | 2,852,054) | 2,087,321) | 1,352,446) | 840,854) | |
| Less: Net cash provided by operating activities | 4,371,900) | 3,708,235) | 2,034,014) | 492,813) | 1,015,856) | |
| Less: Net cash (used in) provided by investing activities | (3,576,200) | (2,457,354) | (687,454) | 216,327) | (925,562) | |
| Cash-flow-statement-based aggregate accruals | 2,715,700) | 1,601,173) | 740,761) | 643,306) | 750,560) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 163.65% | 82.06% | 36.37% | 52.90% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Apple Inc. | -13.44% | -25.90% | -14.62% | 0.00% | 4.86% | |
| Cisco Systems Inc. | -9.79% | 46.78% | -7.65% | -10.18% | 1.64% | |
| Dell Technologies Inc. | 12.75% | -15.65% | 11.23% | -20.97% | — | |
| Super Micro Computer Inc. | -7.24% | 98.99% | 0.89% | 56.84% | 5.08% | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Technology Hardware & Equipment | -8.19% | -2.79% | -10.03% | -4.10% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 6.09% | 6.25% | 1.40% | 2.99% | — | |
Based on: 10-K (reporting date: 2025-12-31), 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).
1 2025 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,715,700 ÷ [(1,627,500 + 1,691,334) ÷ 2] = 163.65%
2 Click competitor name to see calculations.
The analysis reveals a notable trend in cash-flow-statement-based accruals and the corresponding accruals ratio over the four-year period. Net operating assets experienced an initial increase followed by declines, while aggregate accruals and the accruals ratio exhibited significant fluctuations.
- Net Operating Assets
- Net operating assets increased from US$1,862,091 thousand in 2022 to US$2,211,091 thousand in 2023, representing a growth of approximately 18.7%. However, subsequent years witnessed declines, falling to US$1,691,334 thousand in 2024 and further to US$1,627,500 thousand in 2025. This indicates a potential shift in asset management or operational performance.
- Cash-Flow-Statement-Based Aggregate Accruals
- Cash-flow-statement-based aggregate accruals increased from US$643,306 thousand in 2022 to US$740,761 thousand in 2023, a rise of approximately 15.1%. A substantial increase was then observed in 2024, reaching US$1,601,173 thousand, and continued to escalate significantly in 2025 to US$2,715,700 thousand. This suggests a growing reliance on accruals to explain changes in net operating assets.
- Cash-Flow-Statement-Based Accruals Ratio
- The cash-flow-statement-based accruals ratio decreased from 52.90% in 2022 to 36.37% in 2023. However, the ratio experienced a dramatic increase in 2024, reaching 82.06%, and continued to rise sharply in 2025 to 163.65%. This escalating ratio indicates that a progressively larger proportion of changes in net operating assets are attributable to accruals rather than cash flows. A ratio exceeding 100% in 2025 warrants further investigation as it suggests accruals are significantly outpacing cash flows in explaining asset changes.
The increasing accruals ratio, coupled with the declining net operating assets in the later years, may signal potential concerns regarding the quality of earnings. Further investigation into the specific components of accruals is recommended to understand the underlying drivers of these trends and assess any potential risks associated with earnings sustainability.
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