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
General Dynamics Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 48,841) | 45,408) | 35,046) | 32,872) | 31,997) | |
| Less: Cash and equivalents | 902) | 963) | 2,983) | 2,334) | 2,785) | |
| Operating assets | 47,939) | 44,445) | 32,063) | 30,538) | 29,212) | |
| Operating Liabilities | ||||||
| Total liabilities | 35,264) | 33,676) | 23,611) | 21,896) | 21,259) | |
| Less: Short-term debt and current portion of long-term debt | 2,920) | 973) | 2) | 900) | 501) | |
| Less: Long-term debt, excluding current portion | 9,010) | 11,444) | 3,980) | 2,988) | 2,898) | |
| Operating liabilities | 23,334) | 21,259) | 19,629) | 18,008) | 17,860) | |
| Net operating assets1 | 24,605) | 23,186) | 12,434) | 12,530) | 11,352) | |
| Balance-sheet-based aggregate accruals2 | 1,419) | 10,752) | (96) | 1,178) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 5.94% | 60.37% | -0.77% | 9.87% | — | |
| 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: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= 47,939 – 23,334 = 24,605
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= 24,605 – 23,186 = 1,419
3 2019 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,419 ÷ [(24,605 + 23,186) ÷ 2] = 5.94%
4 Click competitor name to see calculations.
The analysis of balance-sheet-based accruals from 2016 to 2019 reveals significant volatility in reporting quality metrics, characterized by a substantial spike in both aggregate accruals and the corresponding ratio during the 2018 fiscal year.
- Net Operating Assets Trend
- Net operating assets remained relatively stable between 2016 and 2017, moving from 12,530 million USD to 12,434 million USD. However, a sharp increase occurred in 2018, with assets rising to 23,186 million USD, followed by a further increase to 24,605 million USD by the end of 2019. This indicates a substantial expansion of the operating balance sheet starting in 2018.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals exhibited extreme fluctuations over the four-year period. After starting at 1,178 million USD in 2016 and dipping to a negative 96 million USD in 2017, accruals surged to 10,752 million USD in 2018. This peak was followed by a significant reduction to 1,419 million USD in 2019, suggesting that the 2018 figures represented an anomalous event rather than a sustainable trend.
- Accruals Ratio Interpretation
- The accruals ratio, which measures the proportion of accruals relative to net operating assets, reflects the same volatility. The ratio shifted from 9.87% in 2016 to -0.77% in 2017, before spiking to 60.37% in 2018. By 2019, the ratio normalized to 5.94%. The exceptionally high ratio in 2018 indicates that a large portion of the assets were driven by non-cash accruals during that period, which typically warrants closer scrutiny regarding the quality of earnings and the sustainability of reported profits.
In summary, while net operating assets have nearly doubled since 2016, the accruals ratio demonstrates a highly irregular pattern. The disproportionate surge in 2018 suggests a significant accounting adjustment or a one-time operational event that temporarily decoupled accruals from the overall growth of the asset base.
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Cash-Flow-Statement-Based Accruals Ratio
General Dynamics Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Net earnings | 3,484) | 3,345) | 2,912) | 2,955) | 2,965) | |
| Less: Net cash provided by operating activities | 2,981) | 3,148) | 3,879) | 2,198) | 2,499) | |
| Less: Net cash (used) provided by investing activities | (994) | (10,234) | (791) | (426) | 200) | |
| Cash-flow-statement-based aggregate accruals | 1,497) | 10,431) | (176) | 1,183) | 266) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 6.26% | 58.57% | -1.41% | 9.91% | — | |
| 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: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,497 ÷ [(24,605 + 23,186) ÷ 2] = 6.26%
2 Click competitor name to see calculations.
An analysis of the cash-flow-statement-based accruals between 2016 and 2019 reveals significant volatility, particularly during the 2018 fiscal year. While metrics remained relatively stable in 2016 and 2017, a substantial divergence occurred in 2018 before trending toward normalization in 2019.
- Net Operating Assets
- Net operating assets remained consistent between 2016 and 2017, hovering around 12.5 billion. A sharp increase is observed in 2018, where assets rose to 23.19 billion, followed by a further moderate increase to 24.61 billion in 2019. This represents a near-doubling of the asset base over the analyzed period.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals exhibited extreme fluctuations. Following a positive value of 1.18 billion in 2016, the figure shifted to -176 million in 2017. A dramatic surge occurred in 2018, with accruals reaching 10.43 billion, before receding sharply to 1.50 billion in 2019.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio reflects the volatility of aggregate accruals relative to net operating assets. The ratio moved from 9.91% in 2016 to -1.41% in 2017. A critical peak occurred in 2018, with the ratio reaching 58.57%, indicating a period where non-cash accounting components significantly outweighed cash-flow components relative to the asset base. By 2019, the ratio normalized to 6.26%, suggesting that the 2018 spike was a transitory event.
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