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, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 14,043,921) | 9,946,806) | 6,775,410) | 5,734,429) | 4,738,919) | |
| Less: Cash and cash equivalents | 2,762,357) | 1,938,606) | 671,707) | 620,813) | 893,219) | |
| Less: Marketable securities | 5,541,116) | 3,069,362) | 2,352,022) | 2,787,502) | 1,979,649) | |
| Operating assets | 5,740,448) | 4,938,838) | 3,751,681) | 2,326,114) | 1,866,051) | |
| Operating Liabilities | ||||||
| Total liabilities | 4,049,114) | 2,727,747) | 1,889,590) | 1,755,829) | 1,418,628) | |
| Operating liabilities | 4,049,114) | 2,727,747) | 1,889,590) | 1,755,829) | 1,418,628) | |
| Net operating assets1 | 1,691,334) | 2,211,091) | 1,862,091) | 570,285) | 447,423) | |
| Balance-sheet-based aggregate accruals2 | (519,757) | 349,000) | 1,291,806) | 122,862) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -26.64% | 17.14% | 106.22% | 24.14% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Apple Inc. | -12.64% | -9.04% | -2.12% | 36.09% | -11.31% | |
| Cisco Systems Inc. | 75.07% | -12.09% | 5.96% | 20.24% | -7.26% | |
| Dell Technologies Inc. | -9.55% | 12.16% | -89.81% | -10.71% | — | |
| Super Micro Computer Inc. | 105.88% | 3.74% | 58.35% | 8.42% | 20.97% | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Technology Hardware & Equipment | 11.96% | -6.96% | -13.35% | 22.01% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 21.42% | 8.98% | 18.09% | 19.16% | — | |
Based on: 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), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 5,740,448 – 4,049,114 = 1,691,334
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 1,691,334 – 2,211,091 = -519,757
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -519,757 ÷ [(1,691,334 + 2,211,091) ÷ 2] = -26.64%
4 Click competitor name to see calculations.
The financial reporting quality measures indicate significant fluctuations over the four-year period ending in December 2024. A detailed examination of the net operating assets, balance-sheet-based aggregate accruals, and the accruals ratio reveals important trends and potential concerns.
- Net Operating Assets
- The net operating assets displayed a substantial increase from approximately $570 million in 2021 to nearly $1.86 billion in 2022, followed by a further increase to about $2.21 billion in 2023. However, in 2024, net operating assets declined notably to around $1.69 billion. This pattern exhibits rapid growth in the first three years, peaking in 2023, with a reversal in 2024 suggesting possible asset disposals, impairments, or operational changes impacting asset levels.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals also demonstrated marked volatility. From roughly $123 million in 2021, they surged dramatically to approximately $1.29 billion in 2022, before sharply decreasing to $349 million in 2023. In 2024, aggregate accruals turned negative, amounting to around negative $520 million. The substantial increase followed by a decrease and eventual negative figure may indicate strong accrual accounting adjustments in 2022 potentially inflating earnings, followed by large reversals or corrections in subsequent years.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, mirrored the volatility seen in aggregate accruals. It rose sharply from 24.14% in 2021 to an exceptionally high 106.22% in 2022, then reverted to 17.14% in 2023, and finally shifted to a negative ratio of -26.64% in 2024. Such fluctuations indicate that in 2022, accruals exceeded net operating assets, a rare occurrence that may point to aggressive revenue recognition or accrual management practices. The return to a smaller positive ratio in 2023 followed by a negative ratio in 2024 suggests a normalization or adjustment phase, potentially reflecting reversals of earlier accruals or changes in accounting policies or business conditions.
Overall, the data reveals periods of significant balance sheet adjustments that could affect earnings quality and should be investigated further. The high 2022 accruals ratio warrants particular scrutiny due to the size and nature of accruals compared to operating assets. The negative accruals ratio in 2024 additionally suggests a shift toward more conservative or potentially corrective accounting treatments. These trends highlight a dynamic operational environment and possible accounting complexities influencing financial reporting quality.
Cash-Flow-Statement-Based Accruals Ratio
Arista Networks Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net income | 2,852,054) | 2,087,321) | 1,352,446) | 840,854) | 634,557) | |
| Less: Net cash provided by operating activities | 3,708,235) | 2,034,014) | 492,813) | 1,015,856) | 735,114) | |
| Less: Net cash (used in) provided by investing activities | (2,457,354) | (687,454) | 216,327) | (925,562) | (608,802) | |
| Cash-flow-statement-based aggregate accruals | 1,601,173) | 740,761) | 643,306) | 750,560) | 508,245) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 82.06% | 36.37% | 52.90% | 147.50% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Apple Inc. | -25.90% | -14.62% | 0.00% | 4.86% | -20.46% | |
| Cisco Systems Inc. | 46.78% | -7.65% | -10.18% | 1.64% | -32.20% | |
| Dell Technologies Inc. | -15.65% | 11.23% | -20.97% | -17.42% | — | |
| Super Micro Computer Inc. | 98.99% | 0.89% | 56.84% | 5.08% | 19.76% | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Technology Hardware & Equipment | -2.79% | -10.03% | -4.10% | -0.72% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 6.29% | 1.46% | 2.91% | 8.62% | — | |
Based on: 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), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,601,173 ÷ [(1,691,334 + 2,211,091) ÷ 2] = 82.06%
2 Click competitor name to see calculations.
The data reveals notable fluctuations across the analyzed financial quality measures over the four-year period.
- Net Operating Assets
- There is a sharp increase from approximately 570 million US dollars in 2021 to over 1.86 billion in 2022, representing more than a threefold growth. This upward trend continues into 2023 with a further increase to about 2.21 billion US dollars. However, in 2024, net operating assets decrease significantly to approximately 1.69 billion, marking a decline from the previous year yet remaining substantially higher than the 2021 level.
- Cash-Flow-Statement-Based Aggregate Accruals
- This metric follows a fluctuating pattern. It begins at 750.56 million US dollars in 2021 and then decreases to 643.31 million in 2022. In 2023, it increases again to 740.76 million, slightly below the 2021 value, before nearly doubling to 1.60 billion US dollars in 2024. The sharp rise in 2024 suggests a substantial increase in accruals relative to previous years.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio shows a downward trend from a very high 147.5% in 2021 to 52.9% in 2022. It further decreases to 36.37% in 2023, indicating a steady reduction in accruals relative to cash flow during this period. However, in 2024, the ratio rises again to 82.06%, suggesting an increase in accruals compared to cash flow, though not reaching the initial high observed in 2021.
Overall, the analysis indicates an initial period of rapid growth in net operating assets accompanied by fluctuating accruals and a declining accruals ratio, which may reflect improvements in earnings quality or operational efficiency. The subsequent year shows a reversal in these trends, with a reduction in net operating assets and an increase in both aggregate accruals and the accruals ratio, which could signal changes in operational dynamics or accounting adjustments that may warrant closer examination.