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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Carrier Global Corp. pages available for free this week:
- Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Profitability Ratios
- Analysis of Reportable Segments
- Common Stock Valuation Ratios
- Enterprise Value to EBITDA (EV/EBITDA)
- Capital Asset Pricing Model (CAPM)
- Dividend Discount Model (DDM)
- Operating Profit Margin since 2020
- Return on Assets (ROA) since 2020
- Price to Earnings (P/E) since 2020
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Balance-Sheet-Based Accruals Ratio
Carrier Global Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|
| Operating Assets | ||||
| Total assets | ||||
| Less: Cash and cash equivalents | ||||
| Operating assets | ||||
| Operating Liabilities | ||||
| Total liabilities | ||||
| Less: Current portion of long-term debt | ||||
| Less: Long-term debt, net of current portion | ||||
| 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).
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 indicates a notable shift in key financial reporting quality measures over the observed period ending December 31, 2022.
- Net Operating Assets
- There is a slight decrease in net operating assets from approximately $13.8 billion to $13.4 billion, reflecting a reduction of about 3%. This suggests minor asset base contraction or changes in the asset and liability structure over the year.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals have undergone a significant change, moving from a positive $113 million to a negative $405 million. This substantial decrease indicates a shift in the timing or recognition of revenues and expenses, potentially highlighting changes in accounting estimates, policies, or the underlying operations impacting accruals.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio turned markedly negative, moving from 0.82% to -2.98%. This corresponds with the aggregate accruals change and suggests a decrease in accounting conservatism or an increase in earnings management risk. The negative ratio indicates that accruals reduced net operating assets, which can affect the quality and sustainability of reported earnings.
Overall, these trends may point to a deterioration in the quality of earnings as measured by accrual-based metrics, coupled with a modest decline in the asset base employed in operations. The sharp reversal in accruals and its ratio warrants further investigation to understand underlying causes and implications for financial performance and reporting reliability.
Cash-Flow-Statement-Based Accruals Ratio
Carrier Global Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|
| Net income attributable to common shareowners | ||||
| Less: Net cash flows provided by operating activities | ||||
| Less: Net cash flows (used in) provided by 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).
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 decreased slightly from 13,803 million US dollars at the end of 2021 to 13,398 million US dollars by the end of 2022. This represents a marginal reduction in the company's operational asset base over the one-year period.
- Cash-flow-statement-based aggregate accruals
- Aggregate accruals, measured in millions of US dollars, showed a notable decline from 119 million in 2021 to 46 million in 2022. This indicates a substantial reduction in accruals, reflecting changes in the timing of reported revenues and expenses relative to actual cash flows.
- Cash-flow-statement-based accruals ratio
- The accruals ratio, expressed as a percentage, decreased from 0.87% in 2021 to 0.34% in 2022. The reduction in this ratio suggests an improvement in the quality of earnings, as a lower accruals ratio generally indicates that a smaller component of earnings is derived from non-cash accounting adjustments.