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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Builders FirstSource Inc. pages available for free this week:
- Balance Sheet: Assets
- Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Liquidity Ratios
- Analysis of Short-term (Operating) Activity Ratios
- Analysis of Long-term (Investment) Activity Ratios
- Common Stock Valuation Ratios
- Enterprise Value to FCFF (EV/FCFF)
- Selected Financial Data since 2005
- Net Profit Margin since 2005
- Analysis of Revenues
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Balance-Sheet-Based Accruals Ratio
Builders FirstSource Inc., 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 maturities of long-term debt | ||||||
| Less: Long-term debt, net of current maturities, discounts and issuance costs | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Boeing Co. | ||||||
| Caterpillar Inc. | ||||||
| Eaton Corp. plc | ||||||
| GE Aerospace | ||||||
| Honeywell International Inc. | ||||||
| Lockheed Martin Corp. | ||||||
| RTX Corp. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Capital Goods | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | ||||||
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 data reveals substantial fluctuations and trends in financial reporting quality over the four-year period analyzed.
- Net Operating Assets
- There is a noticeable increase in net operating assets during the period. Beginning at approximately 2.1 billion USD at the end of 2019, the figure rises moderately to about 2.35 billion USD by the end of 2020. A significant surge occurs in 2021, with net operating assets reaching nearly 7.69 billion USD, followed by a relatively stable level at 7.87 billion USD through 2022. This sharp rise between 2020 and 2021 suggests either major asset acquisitions or operational scaling during that time.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals exhibit pronounced volatility. The figure starts negative at approximately -45 million USD in 2019, indicating a net source of cash from operating activities or potentially conservative accruals. In 2020, the accruals shift dramatically to a large positive value exceeding 251 million USD. The spike continues drastically into 2021 with aggregate accruals expanding to over 5.3 billion USD, pointing to significant non-cash components or adjustments. By 2022, the accruals sharply retract to about 177 million USD, approaching levels observed in 2020 but far below the 2021 peak.
- Balance-sheet-based Accruals Ratio
- The accruals ratio mirrors the patterns in aggregate accruals but provides a proportional context relative to net operating assets. In 2019, the ratio was negative at -2.14%, indicating a small proportion of accruals relative to net assets. This ratio increases to 11.27% in 2020, reflecting accruals comprising a noticeable portion of net assets. In 2021, the ratio escalates significantly to 106.27%, surpassing 100%, which implies that accruals exceeded the net operating assets themselves, an abnormal and potentially concerning indicator regarding earnings quality or asset valuation. By 2022, the ratio recedes sharply to 2.27%, returning to a more typical level.
Overall, the trends suggest heightened volatility in accrual-based measures during 2021, coinciding with a major increase in net operating assets. The disproportionately large accruals ratio in 2021 might indicate increased earnings manipulation risk or extraordinary accounting adjustments, whereas the subsequent normalization in 2022 points to a reversion towards conventional reporting patterns. The significant asset growth paired with extreme accruals ratio warrants scrutiny to understand the underlying causes and their implications for financial statement reliability.
Cash-Flow-Statement-Based Accruals Ratio
Builders FirstSource Inc., 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 | ||||||
| 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 | ||||||
| Boeing Co. | ||||||
| Caterpillar Inc. | ||||||
| Eaton Corp. plc | ||||||
| GE Aerospace | ||||||
| Honeywell International Inc. | ||||||
| Lockheed Martin Corp. | ||||||
| RTX Corp. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Capital Goods | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | ||||||
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 exhibited a strong upward trend from 2019 to 2022. Starting at approximately 2.1 billion US dollars in 2019, the metric increased moderately to around 2.35 billion by the end of 2020. A significant surge occurred in 2021, with the value jumping to nearly 7.7 billion US dollars. This elevated level remained relatively stable in 2022, with a slight increase to approximately 7.87 billion US dollars. The sharp increase between 2020 and 2021 indicates substantial growth or investment in operating assets during that period.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals experienced notable volatility over the reviewed period. The figure was negative in 2019, indicating that cash flows might have exceeded net income or that accruals negatively impacted earnings by about 83.1 million US dollars. In contrast, 2020 saw a reversal to positive accruals totaling roughly 189.7 million US dollars. The upward momentum continued dramatically in 2021, where aggregate accruals reached a peak of approximately 1.33 billion US dollars. However, in 2022, the accruals sharply decreased to about 107.6 million US dollars, suggesting a significant reduction in accrual-based income adjustments relative to the previous year.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrored the trend seen in aggregate accruals but expressed relative to net operating assets. It started negatively at -3.91% in 2019, transitioned to a positive ratio of 8.52% in 2020, and then sharply increased to 26.42% in 2021, reflecting a substantial rise in accruals relative to net operating assets. By 2022, the ratio decreased considerably to 1.38%, signaling a return towards lower accrual levels proportional to operating assets. The pronounced peak in 2021 suggests that accrual-based income components were significantly elevated relative to operating assets during that year, potentially indicating increased estimates or timing differences in reported earnings.