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
Carnival Corp. & plc, balance sheet computation of aggregate accruals
US$ in millions
| Nov 30, 2023 | Nov 30, 2022 | Nov 30, 2021 | Nov 30, 2020 | Nov 30, 2019 | Nov 30, 2018 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 49,120) | 51,703) | 53,344) | 53,593) | 45,058) | 42,401) | |
| Less: Cash and cash equivalents | 2,415) | 4,029) | 8,939) | 9,513) | 518) | 982) | |
| Less: Restricted cash | 11) | 1,988) | 14) | —) | —) | —) | |
| Less: Short-term investments | —) | —) | 200) | —) | —) | —) | |
| Operating assets | 46,694) | 45,686) | 44,191) | 44,080) | 44,540) | 41,419) | |
| Operating Liabilities | |||||||
| Total liabilities | 42,238) | 44,638) | 41,200) | 33,038) | 19,693) | 17,958) | |
| Less: Short-term borrowings | —) | 200) | 2,790) | 3,084) | 231) | 848) | |
| Less: Current portion of long-term debt | 2,089) | 2,393) | 1,927) | 1,742) | 1,596) | 1,578) | |
| Less: Long-term debt, excluding current portion | 28,483) | 31,953) | 28,509) | 22,130) | 9,675) | 7,897) | |
| Operating liabilities | 11,666) | 10,092) | 7,974) | 6,082) | 8,191) | 7,635) | |
| Net operating assets1 | 35,028) | 35,594) | 36,217) | 37,998) | 36,349) | 33,784) | |
| Balance-sheet-based aggregate accruals2 | (566) | (623) | (1,781) | 1,649) | 2,565) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | -1.60% | -1.74% | -4.80% | 4.44% | 7.31% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Airbnb Inc. | — | — | — | — | — | — | |
| Booking Holdings Inc. | -468.72% | -68.38% | — | — | — | — | |
| Chipotle Mexican Grill Inc. | 18.41% | 18.43% | — | — | — | — | |
| DoorDash, Inc. | -21.00% | 112.44% | — | — | — | — | |
| McDonald’s Corp. | 9.94% | 8.46% | — | — | — | — | |
| Starbucks Corp. | 13.66% | 10.72% | -25.79% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Consumer Services | 3.11% | 4.58% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 12.01% | 13.04% | 200.00% | — | — | — | |
Based on: 10-K (reporting date: 2023-11-30), 10-K (reporting date: 2022-11-30), 10-K (reporting date: 2021-11-30), 10-K (reporting date: 2020-11-30), 10-K (reporting date: 2019-11-30), 10-K (reporting date: 2018-11-30).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 46,694 – 11,666 = 35,028
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 35,028 – 35,594 = -566
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -566 ÷ [(35,028 + 35,594) ÷ 2] = -1.60%
4 Click competitor name to see calculations.
The financial reporting quality, as measured by balance-sheet-based accruals, exhibits a significant reversal in trend between 2019 and 2023. Initially characterized by positive accruals, the period from 2021 onward shows a transition toward negative accruals, suggesting a fundamental change in the relationship between reported earnings and operating cash flows.
- Net Operating Assets
- Net operating assets remained relatively stable over the five-year period, peaking at 37,998 million USD in 2020 before gradually declining to 35,028 million USD by November 30, 2023. This stability indicates that the fluctuations in the accruals ratio are primarily driven by changes in the aggregate accruals rather than significant expansions or contractions of the operating asset base.
- Balance-sheet-based Aggregate Accruals
- A transition from positive to negative aggregate accruals is evident. Values decreased from 2,565 million USD in 2019 to 1,649 million USD in 2020, followed by a sharp pivot to negative 1,781 million USD in 2021. While the accruals remained negative through 2023, the magnitude of the negative values diminished to 566 million USD, indicating a gradual narrowing of the gap between accrual-based and cash-based measures.
- Balance-sheet-based Accruals Ratio
- The accruals ratio followed a mirrored trajectory, starting at 7.31% in 2019 and declining to 4.44% in 2020. A significant shift occurred in 2021, where the ratio dropped to negative 4.80%. In the subsequent two years, the ratio trended upward toward zero, recording negative 1.74% in 2022 and negative 1.60% in 2023. This progression suggests that after a period of high accruals, the company entered a phase where cash flows from operations exceeded reported accounting earnings.
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Cash-Flow-Statement-Based Accruals Ratio
Carnival Corp. & plc, cash flow statement computation of aggregate accruals
US$ in millions
| Nov 30, 2023 | Nov 30, 2022 | Nov 30, 2021 | Nov 30, 2020 | Nov 30, 2019 | Nov 30, 2018 | ||
|---|---|---|---|---|---|---|---|
| Net income (loss) | (74) | (6,093) | (9,501) | (10,236) | 2,990) | 3,152) | |
| Less: Net cash provided by (used in) operating activities | 4,281) | (1,670) | (4,109) | (6,301) | 5,475) | 5,549) | |
| Less: Net cash used in investing activities | (2,810) | (4,767) | (3,543) | (3,240) | (5,277) | (3,502) | |
| Cash-flow-statement-based aggregate accruals | (1,545) | 344) | (1,849) | (695) | 2,792) | 1,105) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | -4.38% | 0.96% | -4.98% | -1.87% | 7.96% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Airbnb Inc. | — | — | — | — | — | — | |
| Booking Holdings Inc. | -519.27% | -67.03% | — | — | — | — | |
| Chipotle Mexican Grill Inc. | 24.18% | 30.18% | — | — | — | — | |
| DoorDash, Inc. | -64.28% | -68.90% | — | — | — | — | |
| McDonald’s Corp. | 6.77% | 5.35% | — | — | — | — | |
| Starbucks Corp. | 12.06% | 36.35% | -47.73% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Consumer Services | -4.40% | -8.29% | -11.08% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 4.25% | 1.57% | 21.63% | — | — | — | |
Based on: 10-K (reporting date: 2023-11-30), 10-K (reporting date: 2022-11-30), 10-K (reporting date: 2021-11-30), 10-K (reporting date: 2020-11-30), 10-K (reporting date: 2019-11-30), 10-K (reporting date: 2018-11-30).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,545 ÷ [(35,028 + 35,594) ÷ 2] = -4.38%
2 Click competitor name to see calculations.
The analysis of financial reporting quality for the period between 2019 and 2023 reveals a significant shift in the relationship between reported earnings and cash flows. While the base of net operating assets remained relatively stable, the aggregate accruals and the resulting accruals ratio experienced substantial volatility, moving from a positive position to a predominantly negative one.
- Net Operating Assets Trend
- Net operating assets peaked in 2020 at 37,998 million US dollars and have since followed a gradual downward trajectory, ending at 35,028 million US dollars in 2023. This relative stability suggests that the fluctuations observed in the accruals ratio are driven by changes in the numerator rather than significant shifts in the company's operating asset base.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals transitioned from a high positive value of 2,792 million US dollars in 2019 to negative values in four of the five years analyzed. Significant negative accruals were recorded in 2021 (-1,849 million US dollars) and 2023 (-1,545 million US dollars), with a brief return to a positive balance of 344 million US dollars in 2022.
- Accruals Ratio Interpretation
- The accruals ratio shifted from 7.96% in 2019 to a low of -4.98% in 2021, before closing at -4.38% in 2023. The positive ratio in 2019 indicates that reported earnings exceeded cash flows from operations. Conversely, the persistent negative ratios from 2020 onward suggest that cash flows have exceeded reported earnings. This trend typically reflects the impact of significant non-cash charges, such as impairments or depreciation, which reduce accounting profit without affecting cash liquidity.
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