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
EQT Corp., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 21,607,388) | 18,113,469) | 18,809,227) | 20,721,344) | 29,522,604) | |
| Less: Cash and cash equivalents | 113,963) | 18,210) | 4,596) | 3,487) | 26,311) | |
| Operating assets | 21,493,425) | 18,095,259) | 18,804,631) | 20,717,857) | 29,496,293) | |
| Operating Liabilities | ||||||
| Total liabilities | 11,561,625) | 8,850,739) | 9,005,639) | 9,763,115) | 11,107,991) | |
| Less: Current portion of debt | 954,900) | 154,161) | 16,204) | 704,390) | 12,406) | |
| Less: Credit facility borrowings | —) | 300,000) | 294,000) | 800,000) | 1,295,000) | |
| Less: Term Loan Facility borrowings | —) | —) | 999,353) | —) | —) | |
| Less: Senior notes | 4,435,782) | 4,371,467) | 3,878,366) | 3,882,932) | 4,575,203) | |
| Less: Note payable to EQM Midstream Partners, LP | 94,320) | 99,838) | 105,056) | 110,059) | 114,720) | |
| Operating liabilities | 6,076,623) | 3,925,273) | 3,712,660) | 4,265,734) | 5,110,662) | |
| Net operating assets1 | 15,416,802) | 14,169,986) | 15,091,971) | 16,452,123) | 24,385,631) | |
| Balance-sheet-based aggregate accruals2 | 1,246,816) | (921,985) | (1,360,152) | (7,933,508) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 8.43% | -6.30% | -8.62% | -38.85% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | — | — | — | — | — | |
| ConocoPhillips | — | — | — | — | — | |
| ExxonMobil Holdings Corp. | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Energy | 200.00% | — | — | — | — | |
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= 21,493,425 – 6,076,623 = 15,416,802
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 15,416,802 – 14,169,986 = 1,246,816
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,246,816 ÷ [(15,416,802 + 14,169,986) ÷ 2] = 8.43%
4 Click competitor name to see calculations.
An examination of the balance-sheet-based accruals reveals a consistent upward trajectory from 2018 through 2021. This progression indicates a significant shift in the relationship between reported earnings and the underlying cash flow patterns, characterized by a transition from substantial negative accruals to a positive accrual position.
- Balance-sheet-based accruals ratio
- The ratio demonstrated a steady increase, moving from -38.85% in 2018 to 8.43% in 2021. The sharp rise between 2018 and 2019, where the ratio shifted from -38.85% to -8.62%, suggests a rapid reduction in the gap between cash flows and accrual-based earnings. The eventual shift into positive territory in 2021 indicates that accruals have begun to exceed cash flows relative to the operating asset base.
- Balance-sheet-based aggregate accruals
- Aggregate accruals transitioned from a significant negative value of -7,933,508 thousand US dollars in 2018 to a positive 1,246,816 thousand US dollars by 2021. This trend reflects a reversal in the quality of earnings components, moving away from a period where non-cash charges or conservative accounting likely dominated the financial profile toward a period of positive accrual accumulation.
- Net operating assets
- Net operating assets remained relatively stable over the analyzed period, fluctuating between a high of 16,452,123 thousand US dollars in 2018 and a low of 14,169,986 thousand US dollars in 2020. Because the asset base did not experience drastic volatility, the observed changes in the accruals ratio are primarily driven by the variance in aggregate accruals rather than significant shifts in the company's operating scale.
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Cash-Flow-Statement-Based Accruals Ratio
EQT Corp., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to EQT Corporation | (1,155,759) | (967,166) | (1,221,695) | (2,244,568) | 1,508,529) | |
| Less: Net cash provided by operating activities | 1,662,448) | 1,537,701) | 1,851,704) | 2,976,256) | 1,637,698) | |
| Less: Net cash used in investing activities | (2,072,742) | (1,555,800) | (1,601,142) | (3,979,104) | (4,202,070) | |
| Cash-flow-statement-based aggregate accruals | (745,465) | (949,067) | (1,472,257) | (1,241,720) | 4,072,901) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -5.04% | -6.49% | -9.33% | -6.08% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Chevron Corp. | — | — | — | — | — | |
| ConocoPhillips | — | — | — | — | — | |
| ExxonMobil Holdings Corp. | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | -10.40% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Energy | -10.60% | — | — | — | — | |
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -745,465 ÷ [(15,416,802 + 14,169,986) ÷ 2] = -5.04%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality between 2018 and 2021 reveals a consistent pattern of negative cash-flow-statement-based aggregate accruals. This indicates that cash flows from operations have systematically exceeded accrual-based earnings throughout the period, which is typically associated with conservative accounting practices and high earnings quality.
- Net Operating Assets Trend
- Net operating assets experienced a period of contraction from December 31, 2018, through December 31, 2020, declining from US$ 16,452,123 thousand to US$ 14,169,986 thousand. This downward trend reversed in 2021, with assets increasing to US$ 15,416,802 thousand, reflecting a recovery in the operational asset base.
- Aggregate Accruals Performance
- Cash-flow-statement-based aggregate accruals remained negative across all four years. The negative value peaked in 2019 at US$ -1,472,257 thousand, before trending upward toward zero in 2020 (US$ -949,067 thousand) and 2021 (US$ -745,465 thousand). The narrowing of these negative accruals suggests a reduction in the variance between cash flow and reported accrual earnings over the latter half of the period.
- Accruals Ratio Analysis
- The cash-flow-statement-based accruals ratio mirrored the trend of the aggregate accruals. The ratio widened to its most negative point in 2019 at -9.33%, indicating the highest divergence between cash flows and accruals relative to assets. Subsequently, the ratio improved to -6.49% in 2020 and further to -5.04% by December 31, 2021. The persistence of a negative ratio indicates that the company's earnings are consistently backed by strong cash flow generation.
The overall trajectory from 2019 to 2021 shows a convergence between accrual-based reporting and actual cash flows. While the negative ratios suggest a high quality of earnings, the steady movement of the ratio from -9.33% toward -5.04% indicates a moderation in the scale of these negative accruals relative to the company's net operating assets.
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