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
Emerson Electric Co., balance sheet computation of aggregate accruals
US$ in millions
| Sep 30, 2019 | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2016 | Sep 30, 2015 | Sep 30, 2014 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 20,497) | 20,390) | 19,589) | 21,743) | 22,088) | 24,177) | |
| Less: Cash and equivalents | 1,494) | 1,093) | 3,062) | 3,182) | 3,054) | 3,149) | |
| Operating assets | 19,003) | 19,297) | 16,527) | 18,561) | 19,034) | 21,028) | |
| Operating Liabilities | |||||||
| Total liabilities | 12,224) | 11,400) | 10,819) | 14,125) | 13,960) | 14,010) | |
| Less: Short-term borrowings and current maturities of long-term debt | 1,444) | 1,623) | 862) | 2,584) | 2,553) | 2,465) | |
| Less: Long-term debt, excluding current maturities | 4,277) | 3,137) | 3,794) | 4,062) | 4,289) | 3,559) | |
| Operating liabilities | 6,503) | 6,640) | 6,163) | 7,479) | 7,118) | 7,986) | |
| Net operating assets1 | 12,500) | 12,657) | 10,364) | 11,082) | 11,916) | 13,042) | |
| Balance-sheet-based aggregate accruals2 | (157) | 2,293) | (718) | (834) | (1,126) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | -1.25% | 19.92% | -6.70% | -7.25% | -9.02% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Boeing Co. | — | — | — | — | — | — | |
| Caterpillar Inc. | — | — | — | — | — | — | |
| Eaton Corp. plc | — | — | — | — | — | — | |
| GE Aerospace | — | — | — | — | — | — | |
| Honeywell International Inc. | — | — | — | — | — | — | |
| Lockheed Martin Corp. | — | — | — | — | — | — | |
| RTX Corp. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30), 10-K (reporting date: 2017-09-30), 10-K (reporting date: 2016-09-30), 10-K (reporting date: 2015-09-30), 10-K (reporting date: 2014-09-30).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= 19,003 – 6,503 = 12,500
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= 12,500 – 12,657 = -157
3 2019 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -157 ÷ [(12,500 + 12,657) ÷ 2] = -1.25%
4 Click competitor name to see calculations.
The analysis of the balance-sheet-based accruals ratio reveals a period of relative stability in earnings quality followed by a significant anomaly in 2018 and a subsequent return toward baseline levels in 2019.
- Net Operating Assets Trend
- Net operating assets exhibited a slight decline from 11,916 million US dollars in 2015 to 10,364 million in 2017. This was followed by a substantial increase to 12,657 million in 2018, before stabilizing at 12,500 million in 2019.
- Aggregate Accruals Dynamics
- From 2015 to 2017, balance-sheet-based aggregate accruals remained consistently negative, moving from -1,126 million to -718 million. This suggests that cash flows from operations were generally higher than reported earnings during this period. A sharp reversal occurred in 2018, with accruals surging to 2,293 million, before dropping back to -157 million in 2019.
- Accruals Ratio Interpretation
- The accruals ratio mirrored the trend of aggregate accruals, remaining negative between 2015 and 2017, ranging from -9.02% to -6.70%. This pattern typically indicates conservative accounting and high earnings quality. The ratio spiked to 19.92% in 2018, signaling a period where accruals significantly outpaced net operating assets, which may indicate a temporary decrease in earnings quality or a significant one-time non-cash adjustment. By 2019, the ratio normalized to -1.25%.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
Without a user account, I tend to respond rather slowly.
How can I help you?
Cash-Flow-Statement-Based Accruals Ratio
Emerson Electric Co., cash flow statement computation of aggregate accruals
US$ in millions
| Sep 30, 2019 | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2016 | Sep 30, 2015 | Sep 30, 2014 | ||
|---|---|---|---|---|---|---|---|
| Net earnings common stockholders | 2,306) | 2,203) | 1,518) | 1,635) | 2,710) | 2,147) | |
| Less: Cash provided by operating activities | 3,006) | 2,892) | 2,690) | 2,499) | 2,529) | 3,692) | |
| Less: Cash (used in) provided by investing activities | (1,174) | (2,720) | (3,533) | (549) | 591) | (1,159) | |
| Cash-flow-statement-based aggregate accruals | 474) | 2,031) | 2,361) | (315) | (410) | (386) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 3.77% | 17.64% | 22.02% | -2.74% | -3.29% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Boeing Co. | — | — | — | — | — | — | |
| Caterpillar Inc. | — | — | — | — | — | — | |
| Eaton Corp. plc | — | — | — | — | — | — | |
| GE Aerospace | — | — | — | — | — | — | |
| Honeywell International Inc. | — | — | — | — | — | — | |
| Lockheed Martin Corp. | — | — | — | — | — | — | |
| RTX Corp. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30), 10-K (reporting date: 2017-09-30), 10-K (reporting date: 2016-09-30), 10-K (reporting date: 2015-09-30), 10-K (reporting date: 2014-09-30).
1 2019 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 474 ÷ [(12,500 + 12,657) ÷ 2] = 3.77%
2 Click competitor name to see calculations.
The financial data for the period between 2015 and 2019 indicates a significant fluctuation in reporting quality as measured by aggregate accruals. While the initial years showed conservative accounting patterns, a sharp increase in accruals occurred mid-period before stabilizing toward the end of the analyzed timeframe.
- Net Operating Assets
- Net operating assets exhibited a declining trend from 2015 to 2017, moving from 11,916 million to 10,364 million. This was followed by a substantial increase in 2018 to 12,657 million, before remaining relatively stable at 12,500 million in 2019.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals transitioned from negative values in 2015 and 2016 (-410 million and -315 million, respectively) to a sharp positive spike in 2017, reaching 2,361 million. This elevated level persisted into 2018 at 2,031 million before decreasing significantly to 474 million by 2019.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio closely mirrors the trend of aggregate accruals. The ratio was negative in 2015 (-3.29%) and 2016 (-2.74%), suggesting that cash flows exceeded reported earnings during this period. A dramatic increase is observed in 2017, where the ratio peaked at 22.02%, followed by a moderation to 17.64% in 2018. By 2019, the ratio returned to a lower level of 3.77%, indicating a normalization of the gap between earnings and cash flows.
The period between 2017 and 2018 is characterized by a marked divergence between accrual-based earnings and cash flows, as evidenced by the sharp rise in both the aggregate accruals and the accruals ratio. The return to a lower ratio in 2019 suggests a reduction in the reliance on non-cash earnings components relative to the asset base.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
Without a user account, I tend to respond rather slowly.
How can I help you?