Microsoft Excel LibreOffice Calc

Emerson Electric Co. (EMR)

Financial Reporting Quality: Aggregate Accruals

Difficulty: Advanced

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

Emerson Electric Co., balance sheet computation of aggregate accruals

US$ in millions

Microsoft Excel LibreOffice Calc
Sep 30, 2018 Sep 30, 2017 Sep 30, 2016 Sep 30, 2015 Sep 30, 2014 Sep 30, 2013
Operating Assets
Total assets 20,390  19,589  21,743  22,088  24,177  24,711 
Less: Cash and equivalents 1,093  3,062  3,182  3,054  3,149  3,275 
Operating assets 19,297  16,527  18,561  19,034  21,028  21,436 
Operating Liabilities
Total liabilities 11,400  10,819  14,125  13,960  14,010  13,993 
Less: Short-term borrowings and current maturities of long-term debt 1,623  862  2,584  2,553  2,465  1,587 
Less: Long-term debt, excluding current maturities 3,137  3,794  4,062  4,289  3,559  4,055 
Operating liabilities 6,640  6,163  7,479  7,118  7,986  8,351 
Net operating assets1 12,657  10,364  11,082  11,916  13,042  13,085 
Balance-sheet-based aggregate accruals2 2,293  (718) (834) (1,126) (43) —
Ratio
Balance-sheet-based accruals ratio3 19.92% -6.70% -7.25% -9.02% -0.33% —
Benchmarks
Balance-Sheet-Based Accruals Ratio, Industry
Industrials 4.94% 8.49% -15.11% -22.63% 200.00% —

Based on: 10-K (filing date: 2018-11-19), 10-K (filing date: 2017-11-20), 10-K (filing date: 2016-11-16), 10-K (filing date: 2015-11-18), 10-K (filing date: 2014-11-19), 10-K (filing date: 2013-11-19).

1 2018 Calculation
Net operating assets = Operating assets – Operating liabilities
= 19,297 – 6,640 = 12,657

2 2018 Calculation
Balance-sheet-based aggregate accruals = Net operating assets 2018 – Net operating assets 2017
= 12,657 – 10,364 = 2,293

3 2018 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,293 ÷ [(12,657 + 10,364) ÷ 2] = 19.92%

Ratio Description The company
Balance-sheet-based accruals ratio Ratio is found by dividing balance-sheet-based aggregate accruals by average net operating assets. Using the balance-sheet-based accruals ratio, Emerson Electric Co. deteriorated earnings quality from 2017 to 2018.

Cash-Flow-Statement-Based Accruals Ratio

Emerson Electric Co., cash flow statement computation of aggregate accruals

US$ in millions

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Sep 30, 2018 Sep 30, 2017 Sep 30, 2016 Sep 30, 2015 Sep 30, 2014 Sep 30, 2013
Net earnings common stockholders 2,203  1,518  1,635  2,710  2,147  2,004 
Less: Cash provided by operating activities 2,892  2,690  2,499  2,529  3,692  3,649 
Less: Cash (used in) provided by investing activities (2,720) (3,533) (549) 591  (1,159) (789)
Cash-flow-statement-based aggregate accruals 2,031  2,361  (315) (410) (386) (856)
Ratio
Cash-flow-statement-based accruals ratio1 17.64% 22.02% -2.74% -3.29% -2.95% —
Benchmarks
Cash-Flow-Statement-Based Accruals Ratio, Industry
Industrials 0.53% -2.18% -8.32% -6.18% -1.74% —

Based on: 10-K (filing date: 2018-11-19), 10-K (filing date: 2017-11-20), 10-K (filing date: 2016-11-16), 10-K (filing date: 2015-11-18), 10-K (filing date: 2014-11-19), 10-K (filing date: 2013-11-19).

1 2018 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,031 ÷ [(12,657 + 10,364) ÷ 2] = 17.64%

Ratio Description The company
Cash-flow-statement-based accruals ratio Ratio is found by dividing cash-flow-statement-based aggregate accruals by average net operating assets. Using the cash-flow-statement-based accruals ratio, Emerson Electric Co. improved earnings quality from 2017 to 2018.