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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- Cash Flow Statement
- Analysis of Profitability Ratios
- Analysis of Solvency Ratios
- Analysis of Short-term (Operating) Activity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Analysis of Geographic Areas
- Enterprise Value (EV)
- Capital Asset Pricing Model (CAPM)
- Current Ratio since 2005
- Price to Book Value (P/BV) since 2005
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Balance-Sheet-Based Accruals Ratio
EMC Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Short-term investments | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Notes converted and payable | ||||||
| Less: Short-term debt | ||||||
| Less: Current portion of convertible debt | ||||||
| Less: Long-term debt | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Advanced Micro Devices Inc. | ||||||
| Analog Devices Inc. | ||||||
| Applied Materials Inc. | ||||||
| Broadcom Inc. | ||||||
| Intel Corp. | ||||||
| KLA Corp. | ||||||
| Lam Research Corp. | ||||||
| Micron Technology Inc. | ||||||
| NVIDIA Corp. | ||||||
| Qualcomm Inc. | ||||||
| Texas Instruments Inc. | ||||||
Based on: 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31), 10-K (reporting date: 2011-12-31).
1 2015 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2015 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2015 – Net operating assets2014
= – =
3 2015 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
-
Net operating assets show a generally stable trend over the four-year period. The value increased from 19,009 million US dollars in 2012 to a peak of 20,699 million US dollars in 2014. However, there was a slight decline to 20,218 million US dollars in 2015, suggesting a modest reduction in the asset base towards the end of the period.
- Balance-sheet-based aggregate accruals
-
Aggregate accruals demonstrate a significant downward trend. Starting at 2,095 million US dollars in 2012, the figure decreased sharply over the years, dropping to 418 million in 2014 and eventually turning negative (-481 million) in 2015. This shift from positive to negative accruals may indicate a change in the company's earnings quality or accounting practices affecting asset and liability recognition.
- Balance-sheet-based accruals ratio
-
The accruals ratio, expressed as a percentage, declined consistently throughout the period. Beginning at 11.66% in 2012, it fell to 6.47% in 2013, further reduced to 2.04% in 2014, and reached a negative value of -2.35% in 2015. The downward movement to negative territory aligns with the reduction in aggregate accruals and may suggest increased earnings conservatism or a shift towards cash-based earnings components.
Cash-Flow-Statement-Based Accruals Ratio
EMC Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | ||
|---|---|---|---|---|---|---|
| Net income attributable to EMC Corporation | ||||||
| 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 | ||||||
| Advanced Micro Devices Inc. | ||||||
| Analog Devices Inc. | ||||||
| Applied Materials Inc. | ||||||
| Broadcom Inc. | ||||||
| Intel Corp. | ||||||
| KLA Corp. | ||||||
| Lam Research Corp. | ||||||
| Micron Technology Inc. | ||||||
| NVIDIA Corp. | ||||||
| Qualcomm Inc. | ||||||
| Texas Instruments Inc. | ||||||
Based on: 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31), 10-K (reporting date: 2011-12-31).
1 2015 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 demonstrated a generally stable trend from 2012 to 2015, with an initial increase from 19,009 million US dollars in 2012 to 20,699 million US dollars in 2014, followed by a slight decrease to 20,218 million US dollars in 2015. This suggests a relatively consistent investment in operating assets over the observed period, with a minor reduction in the final year.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals exhibited significant variability. There was a notable increase from 375 million US dollars in 2012 to 1,726 million US dollars in 2013. Subsequently, the accruals reversed direction sharply, moving to negative values of -1,258 million US dollars in 2014 and -642 million US dollars in 2015. This pattern indicates volatility in accruals, with a marked shift from positive to negative accruals starting in 2014.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio aligns with the aggregate accruals' behavior. Starting at 2.09% in 2012, it rose substantially to 8.79% in 2013, then turned negative to -6.14% in 2014, and slightly improved but remained negative at -3.14% in 2015. The fluctuations and eventual negative figures may reflect changing operational dynamics affecting the quality of earnings and suggest a decrease in earnings quality in the last two years compared to the earlier period.