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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Eaton Corp. plc pages available for free this week:
- Statement of Comprehensive Income
- Balance Sheet: Assets
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Geographic Areas
- Common Stock Valuation Ratios
- Enterprise Value to EBITDA (EV/EBITDA)
- Enterprise Value to FCFF (EV/FCFF)
- Net Profit Margin since 2005
- Return on Equity (ROE) since 2005
- Total Asset Turnover since 2005
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Balance-Sheet-Based Accruals Ratio
Eaton Corp. plc, balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash | ||||||
| Less: Short-term investments | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term debt | ||||||
| Less: Current portion of long-term debt | ||||||
| Less: Long-term debt, excluding 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. | ||||||
| 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: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= – =
3 2025 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 balance-sheet-based accruals ratio exhibits considerable fluctuation over the observed period. Net operating assets demonstrate a generally increasing trend, while aggregate accruals and the resulting accruals ratio display more volatile behavior.
- Net Operating Assets
- Net operating assets increased from US$25,174 million in 2022 to US$25,729 million in 2023, experienced a slight decrease to US$25,602 million in 2024, and then increased significantly to US$28,561 million in 2025. This indicates overall asset growth, with a notable acceleration in the final year.
- Balance-Sheet-Based Aggregate Accruals
- Balance-sheet-based aggregate accruals decreased from US$712 million in 2022 to US$555 million in 2023. A substantial shift occurred in 2024, with accruals becoming negative at -US$127 million. Accruals then rose dramatically to US$2,959 million in 2025. This pattern suggests a changing relationship between reported earnings and underlying cash flows.
- Balance-Sheet-Based Accruals Ratio
- The balance-sheet-based accruals ratio followed a corresponding pattern. It decreased from 2.87% in 2022 to 2.18% in 2023. In 2024, the ratio turned negative, reaching -0.49%. The ratio increased substantially in 2025, reaching 10.93%. A rising accruals ratio can indicate increasing reliance on accrual accounting, potentially signaling aggressive revenue recognition or delayed expense recognition. The negative value in 2024 suggests a reversal of prior accruals or a stronger relationship between earnings and cash flow in that year. The significant increase in 2025 warrants further investigation to determine the underlying drivers and assess potential implications for earnings quality.
The substantial changes in aggregate accruals and the accruals ratio, particularly the shift to negative accruals in 2024 and the subsequent large positive value in 2025, suggest potential areas for deeper scrutiny. These fluctuations could be indicative of changes in accounting practices, business operations, or economic conditions. Further analysis, including a review of the underlying components of accruals and comparison to industry peers, is recommended.
Cash-Flow-Statement-Based Accruals Ratio
Eaton Corp. plc, cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Eaton ordinary shareholders | ||||||
| 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 | ||||||
| Boeing Co. | ||||||
| Caterpillar Inc. | ||||||
| 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: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 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.
The analysis reveals fluctuating patterns in net operating assets and cash-flow-statement-based accruals over the four-year period. Net operating assets demonstrate a general upward trajectory, while the cash-flow-statement-based accruals ratio exhibits considerable volatility.
- Net Operating Assets
- Net operating assets increased from US$25,174 million in 2022 to US$25,729 million in 2023, representing a moderate growth rate. A slight decrease was observed in 2024, with a value of US$25,602 million, followed by a more substantial increase to US$28,561 million in 2025. This suggests a strengthening asset base, particularly in the most recent year.
- Cash-Flow-Statement-Based Aggregate Accruals
- Cash-flow-statement-based aggregate accruals were US$1,129 million in 2022, increasing significantly to US$2,169 million in 2023. A substantial shift occurred in 2024, with accruals becoming negative at -US$262 million. Accruals then turned positive again in 2025, reaching US$716 million. This pattern indicates considerable variability in non-cash adjustments impacting reported earnings.
- Cash-Flow-Statement-Based Accruals Ratio
- The cash-flow-statement-based accruals ratio mirrored the trend in aggregate accruals. It rose from 4.55% in 2022 to 8.52% in 2023, indicating a greater proportion of earnings derived from accruals. The ratio became negative in 2024 at -1.02%, suggesting a reversal in the relationship between earnings and cash flow. The ratio recovered to 2.64% in 2025, but remained below the levels observed in 2022 and 2023. The fluctuation warrants further investigation to understand the underlying drivers of these changes and their potential impact on earnings quality.
The significant changes in the accruals ratio, particularly the negative value in 2024, suggest potential areas for further scrutiny. A deeper dive into the components of accruals is recommended to assess whether these fluctuations are attributable to normal business operations or potentially indicative of earnings management practices.