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
Ecolab Inc., 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 | 21,206,400) | 18,126,000) | 20,869,100) | 20,074,500) | 19,962,400) | |
| Less: Cash and cash equivalents | 359,900) | 1,260,200) | 186,400) | 114,700) | 211,400) | |
| Operating assets | 20,846,500) | 16,865,800) | 20,682,700) | 19,959,800) | 19,751,000) | |
| Operating Liabilities | ||||||
| Total liabilities | 13,953,300) | 11,924,500) | 12,143,300) | 12,020,900) | 12,273,700) | |
| Less: Short-term debt | 411,000) | 17,300) | 380,600) | 743,600) | 564,400) | |
| Less: Long-term debt, excluding current maturities | 8,347,200) | 6,669,300) | 5,973,500) | 6,301,600) | 6,758,300) | |
| Operating liabilities | 5,195,100) | 5,237,900) | 5,789,200) | 4,975,700) | 4,951,000) | |
| Net operating assets1 | 15,651,400) | 11,627,900) | 14,893,500) | 14,984,100) | 14,800,000) | |
| Balance-sheet-based aggregate accruals2 | 4,023,500) | (3,265,600) | (90,600) | 184,100) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 29.50% | -24.63% | -0.61% | 1.24% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Linde plc | — | — | — | — | — | |
| Sherwin-Williams Co. | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Chemicals | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Materials | 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
= 20,846,500 – 5,195,100 = 15,651,400
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 15,651,400 – 11,627,900 = 4,023,500
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 4,023,500 ÷ [(15,651,400 + 11,627,900) ÷ 2] = 29.50%
4 Click competitor name to see calculations.
An analysis of the balance-sheet-based accruals from 2018 to 2021 reveals significant volatility in financial reporting quality metrics, characterized by a dramatic shift in the relationship between net operating assets and aggregate accruals.
- Net Operating Assets Trend
- Net operating assets remained relatively stable between 2018 and 2019, followed by a notable contraction in 2020 to US$ 11,627,900 thousand. By 2021, this figure recovered and expanded to a four-year peak of US$ 15,651,400 thousand, indicating a substantial reinvestment or increase in operational asset requirements.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals transitioned from a modest positive value in 2018 (US$ 184,100 thousand) to a severe negative position in 2020 (US$ -3,265,600 thousand). This trend reversed sharply in 2021, reaching a high of US$ 4,023,500 thousand. Such wide fluctuations suggest a significant decoupling of accrual-based accounting earnings from actual cash flow movements over the analyzed period.
- Accruals Ratio Interpretation
- The accruals ratio exhibited extreme variance, moving from 1.24% in 2018 to -24.63% in 2020, and subsequently surging to 29.50% in 2021. The deep negative ratio in 2020 implies a period where cash flows were significantly higher than reported accrual earnings. Conversely, the sharp spike to 29.50% in 2021 indicates a shift where accruals heavily outweighed cash flows, which may suggest a decrease in the immediate quality of earnings or a rapid expansion of the balance sheet that has not yet translated into cash.
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Cash-Flow-Statement-Based Accruals Ratio
Ecolab Inc., 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 Ecolab | 1,129,900) | (1,205,100) | 1,558,900) | 1,429,100) | 1,508,400) | |
| Less: Cash provided by operating activities | 2,061,900) | 1,741,800) | 2,420,700) | 2,277,700) | 2,091,300) | |
| Less: Cash used for investing activities | (4,579,700) | (857,700) | (1,199,100) | (1,030,000) | (1,673,200) | |
| Cash-flow-statement-based aggregate accruals | 3,647,700) | (2,089,200) | 337,300) | 181,400) | 1,090,300) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 26.74% | -15.75% | 2.26% | 1.22% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Linde plc | — | — | — | — | — | |
| Sherwin-Williams Co. | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Chemicals | -8.12% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Materials | -9.09% | — | — | — | — | |
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 × 3,647,700 ÷ [(15,651,400 + 11,627,900) ÷ 2] = 26.74%
2 Click competitor name to see calculations.
Analysis of the cash-flow-statement-based accruals ratio reveals a period of significant volatility between 2018 and 2021. While the first two years of the period exhibit relative stability and low accrual levels, the subsequent two years show extreme fluctuations in both the absolute magnitude and direction of aggregate accruals.
- Net Operating Assets Trend
- Net operating assets remained relatively stable between 2018 and 2019, hovering around $14.9 billion. A notable contraction occurred in 2020, with assets decreasing to $11.6 billion, followed by a recovery in 2021 to a four-year peak of $15.7 billion.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals shifted from modest positive values of $181.4 million in 2018 and $337.3 million in 2019 to a substantial negative value of $2.09 billion in 2020. This negative trend reversed sharply in 2021, with accruals climbing to $3.65 billion.
- Accruals Ratio Interpretation
- The accruals ratio followed the volatility of the aggregate accruals, moving from 1.22% in 2018 and 2.26% in 2019 to -15.75% in 2020. The negative ratio in 2020 indicates a period where cash flows from operations significantly exceeded accrual-based earnings. Conversely, the surge to 26.74% in 2021 indicates a significant divergence where accrual-based earnings heavily outweighed cash flow, suggesting a potential decrease in the quality of earnings relative to cash generation during that specific fiscal year.
The overall pattern suggests that the financial reporting quality, as measured by the accruals ratio, underwent a drastic swing from a cash-rich earnings profile in 2020 to a high-accrual profile in 2021. This divergence indicates that the components of operating assets and liabilities experienced rapid shifts that disconnected accrual accounting from actual cash movements during the latter half of the analyzed period.
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