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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DuPont de Nemours Inc. pages available for free this week:
- Balance Sheet: Assets
- Analysis of Geographic Areas
- Enterprise Value to EBITDA (EV/EBITDA)
- Price to FCFE (P/FCFE)
- Present Value of Free Cash Flow to Equity (FCFE)
- Selected Financial Data since 2005
- Return on Assets (ROA) since 2005
- Current Ratio since 2005
- Debt to Equity since 2005
- Analysis of Revenues
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Balance-Sheet-Based Accruals Ratio
DuPont de Nemours Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Marketable securities | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term borrowings and finance lease obligations | ||||||
| Less: Long-term debt, excluding debt within one year | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Linde plc | ||||||
| Sherwin-Williams Co. | ||||||
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= – =
3 2019 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.
- Net Operating Assets
- The net operating assets experienced a substantial increase from 41,985 million US dollars in 2016 to 121,604 million US dollars in 2017, representing nearly a threefold rise. It then maintained a relatively stable level with a slight increase to 123,027 million US dollars in 2018. However, in 2019, there was a pronounced decline to 57,463 million US dollars, which is less than half of the previous year's amount. This fluctuation indicates significant changes in the company's asset base used in operations over the examined period.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals showed considerable volatility. Starting at 7,169 million US dollars in 2016, the figure surged sharply to 79,619 million US dollars in 2017. In 2018, the accruals dramatically decreased to 1,423 million US dollars, followed by a substantial reversal to a negative value of -65,564 million US dollars in 2019. These shifts suggest significant changes in non-cash components of earnings, which may impact earnings quality.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, mirrors the volatility seen in aggregate accruals. It rose markedly from 18.67% in 2016 to an exceptionally high 97.34% in 2017, indicating a disproportionately large amount of accruals relative to net operating assets in that year. The ratio then dramatically dropped to 1.16% in 2018, suggesting a return to a more normalized proportion. In 2019, the ratio became significantly negative at -72.65%, reflecting the negative accruals in relation to net operating assets and indicating possible earnings adjustments or reversals.
- Overall Trends and Insights
- The data depict a period of heightened variability in both net operating assets and accrual-based measures. The peaks in 2017 for net operating assets and aggregate accruals, coupled with the near doubling of the accruals ratio, indicate a year of expansion accompanied by increased accrual activity. The subsequent sharp declines in 2018 and particularly 2019 point to either asset base reductions, changes in accounting estimates or policies, or operational shifts leading to significant accrual reversals. The pronounced swings in accrual measures suggest volatility in earnings components, which may affect the predictability and reliability of reported earnings over these years.
Cash-Flow-Statement-Based Accruals Ratio
DuPont de Nemours Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Net income attributable to DuPont | ||||||
| Less: Cash provided by operating activities | ||||||
| Less: Cash (used for) 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 | ||||||
| Linde plc | ||||||
| Sherwin-Williams Co. | ||||||
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 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 experienced a substantial increase from approximately 41.99 billion USD at the end of 2016 to about 121.60 billion USD in 2017. This figure remained relatively stable in 2018, slightly increasing to approximately 123.03 billion USD. However, in 2019, there was a notable decline to around 57.46 billion USD, indicating a significant reduction in net operating assets compared to the two preceding years.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals showed considerable volatility during the period. In 2016, the value was positive at 2.32 billion USD, but shifted dramatically to a negative figure of approximately -11.51 billion USD in 2017, suggesting potential increased non-cash expenses or changes in working capital components. The accruals then reverted to positive values in 2018 and 2019, with 1.58 billion USD and 1.40 billion USD respectively, indicating a normalization or improvement in cash-flow-related adjustments.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrored the trend seen in aggregate accruals, starting at 6.04% in 2016 before sharply declining to -14.07% in 2017. This marked shift reflects a significant change in the proportion of accruals relative to net operating assets or cash flows. The ratio then improved to positive, yet modest values, recording 1.29% in 2018 and slightly increasing to 1.55% in 2019. This suggests a stabilization or improvement in the quality of earnings through cash flow generation in the latter periods.