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
EOG Resources Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 37,124,608) | 33,934,474) | 29,833,078) | 29,459,433) | 26,975,244) | |
| Less: Cash and cash equivalents | 2,027,972) | 1,555,634) | 834,228) | 1,599,895) | 718,506) | |
| Operating assets | 35,096,636) | 32,378,840) | 28,998,850) | 27,859,538) | 26,256,738) | |
| Operating Liabilities | ||||||
| Total liabilities | 15,483,892) | 14,570,286) | 13,549,805) | 15,477,852) | 14,032,209) | |
| Less: Current portion of long-term debt | 1,014,524) | 913,093) | 356,235) | 6,579) | 6,579) | |
| Less: Long-term debt, excluding current portion | 4,160,919) | 5,170,169) | 6,030,836) | 6,979,779) | 6,653,685) | |
| Operating liabilities | 10,308,449) | 8,487,024) | 7,162,734) | 8,491,494) | 7,371,945) | |
| Net operating assets1 | 24,788,187) | 23,891,816) | 21,836,116) | 19,368,044) | 18,884,793) | |
| Balance-sheet-based aggregate accruals2 | 896,371) | 2,055,700) | 2,468,072) | 483,251) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 3.68% | 8.99% | 11.98% | 2.53% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | — | — | — | — | — | |
| ConocoPhillips | — | — | — | — | — | |
| Exxon Mobil Corp. | — | — | — | — | — | |
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
= 35,096,636 – 10,308,449 = 24,788,187
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= 24,788,187 – 23,891,816 = 896,371
3 2019 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 896,371 ÷ [(24,788,187 + 23,891,816) ÷ 2] = 3.68%
4 Click competitor name to see calculations.
An analysis of the financial reporting quality from 2016 to 2019 reveals a period of expansion in net operating assets coupled with a significant fluctuation in aggregate accruals. While the asset base grew consistently, the balance-sheet-based accruals ratio experienced a sharp peak in 2017 before trending downward, suggesting a shift in the relationship between reported earnings and cash flow.
- Net Operating Assets Trend
- A consistent upward trajectory is observed in net operating assets, which grew from US$ 19.37 billion in 2016 to US$ 24.79 billion by 2019. This steady increase indicates a continuous expansion of the company's operational resource base over the four-year period.
- Aggregate Accruals Performance
- Balance-sheet-based aggregate accruals exhibited significant volatility. After a relatively low starting point of US$ 483.25 million in 2016, accruals spiked to a peak of US$ 2.47 billion in 2017. This was followed by a gradual decline to US$ 2.06 billion in 2018 and a further reduction to US$ 896.37 million in 2019.
- Accruals Ratio Interpretation
- The balance-sheet-based accruals ratio mirrors the trend of aggregate accruals, rising from 2.53% in 2016 to 11.98% in 2017. The subsequent decline to 8.99% in 2018 and 3.68% in 2019 indicates a normalization of reporting quality. The reduction in this ratio suggests that a smaller proportion of the company's operating assets is comprised of accruals, which typically aligns with an improvement in the quality of earnings and a stronger correlation between reported profits and actual cash flows.
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Cash-Flow-Statement-Based Accruals Ratio
EOG Resources Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Net income (loss) | 2,734,910) | 3,419,040) | 2,582,579) | (1,096,686) | (4,524,515) | |
| Less: Net cash provided by operating activities | 8,163,180) | 7,768,608) | 4,265,336) | 2,359,063) | 3,595,165) | |
| Less: Net cash used in investing activities | (6,177,173) | (6,170,162) | (3,987,409) | (1,252,944) | (5,320,256) | |
| Cash-flow-statement-based aggregate accruals | 748,903) | 1,820,594) | 2,304,652) | (2,202,805) | (2,799,424) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 3.08% | 7.96% | 11.19% | -11.52% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Chevron Corp. | — | — | — | — | — | |
| ConocoPhillips | — | — | — | — | — | |
| Exxon Mobil Corp. | — | — | — | — | — | |
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 × 748,903 ÷ [(24,788,187 + 23,891,816) ÷ 2] = 3.08%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality between 2016 and 2019 reveals a consistent expansion of the operating asset base accompanied by significant volatility and subsequent stabilization in the relationship between accounting earnings and cash flows.
- Net Operating Assets Trend
- A steady upward trajectory is observed in net operating assets, which grew from 19.37 billion USD in 2016 to 24.79 billion USD in 2019. This consistent annual increase indicates a continuous expansion of the company's operating resource base over the four-year period.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals shifted from a negative value of -2.20 billion USD in 2016 to a positive 2.30 billion USD in 2017. Following this peak, a steady decline was recorded, with values dropping to 1.82 billion USD in 2018 and further decreasing to 748.90 million USD by the end of 2019.
- Accruals Ratio and Earnings Quality
- The cash-flow-statement-based accruals ratio experienced a sharp reversal from -11.52% in 2016 to 11.19% in 2017. Subsequently, a clear downward trend emerged, with the ratio falling to 7.96% in 2018 and reaching 3.08% in 2019. This convergence toward zero suggests that reported earnings became increasingly aligned with actual cash flows over time, typically signifying an improvement in the quality of financial reporting and a reduction in the reliance on non-cash accounting accruals.
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