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 | -8.63% | — | — | — | — | |
| Sherwin-Williams Co. | 1.78% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Chemicals | -6.91% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Materials | -5.48% | 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.
- Net Operating Assets
- The net operating assets exhibit fluctuations over the four-year period. Starting at approximately $14.98 billion in 2018, there was a slight decrease to around $14.89 billion in 2019. In 2020, the value significantly declined to about $11.63 billion, followed by a substantial increase to approximately $15.65 billion in 2021. This pattern indicates variability in the company's investment in net operating assets, with a notable dip in 2020 before recovery and growth in 2021.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals show considerable volatility during the period under review. In 2018, the figure was positive at $184.1 million but turned negative in 2019 to -$90.6 million. This negative trend steepened sharply in 2020, reaching -$3.27 billion, indicating substantial decreases in accrued liabilities or increased accrual reversals. However, in 2021, the accruals reversed dramatically to a positive value of $4.02 billion. These large swings suggest material changes in the company's accrual accounting or operational adjustments affecting working capital components.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, reflects the trends observed in aggregate accruals. It commenced at a modest positive value of 1.24% in 2018, shifted to a negative ratio of -0.61% in 2019, and plunged sharply to -24.63% in 2020. The ratio then surged to a significant positive figure of 29.5% in 2021. This pattern indicates notable fluctuations in the proportion of accruals relative to net operating assets, pointing to potential irregularities or significant adjustments in accrual components impacting earnings quality over the period.
Cash-Flow-Statement-Based Accruals Ratio
Ecolab Inc., cash flow statement computation of aggregate accruals
US$ 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 | -4.85% | — | — | — | — | |
| Sherwin-Williams Co. | 0.82% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Chemicals | -3.92% | -8.12% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Materials | -4.42% | -8.43% | — | — | — | |
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.
The analysis of the financial reporting quality measures over the periods ending December 31, 2018, through December 31, 2021, reveals notable fluctuations in key metrics.
- Net Operating Assets
- The net operating assets exhibited a relatively stable position between 2018 and 2019, with a slight decrease from approximately 14.98 billion US dollars to 14.89 billion US dollars. However, there was a significant decline in 2020, dropping sharply to about 11.63 billion US dollars. In 2021, the figure rebounded strongly, reaching approximately 15.65 billion US dollars, the highest within the analyzed timeframe. This pattern suggests a major contraction in operating assets during 2020, followed by a substantial recovery in the subsequent year.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals demonstrated considerable volatility. Initially, accruals increased from 181.4 million US dollars in 2018 to 337.3 million US dollars in 2019, indicating a moderate growth. Contrarily, 2020 saw a drastic negative shift with aggregate accruals falling to negative 2.09 billion US dollars, reflecting potentially significant changes in working capital or operational adjustments. In 2021, the accruals surged positively to 3.65 billion US dollars, representing an extremely high and unusual value compared to prior years.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio closely mirrors the behavior of aggregate accruals relative to net operating assets. From a low ratio of 1.22% in 2018, it increased to 2.26% in 2019, signifying moderate accrual activity. This was followed by a steep decline to negative 15.75% in 2020, highlighting significant negative accruals relative to net operating assets. The ratio then reversed dramatically to a high positive 26.74% in 2021, indicating an unusual and significant increase in accruals relative to the size of the operating assets. Such fluctuations are indicative of extreme variations in accrual accounting components within the cash flow statement.
Overall, these metrics illustrate a period of considerable instability and large swings in accrual activity, particularly pronounced in 2020 and 2021. The sharp negative accruals in 2020 and the subsequent large positive accruals in 2021 may warrant further examination to understand the underlying causes influencing financial reporting quality during these years.