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
HP Inc., balance sheet computation of aggregate accruals
US$ in millions
| Oct 31, 2018 | Oct 31, 2017 | Oct 31, 2016 | Oct 31, 2015 | Oct 31, 2014 | Oct 31, 2013 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 34,622) | 32,913) | 29,010) | 106,882) | 103,206) | 105,676) | |
| Less: Cash and cash equivalents | 5,166) | 6,997) | 6,288) | 17,433) | 15,133) | 12,163) | |
| Operating assets | 29,456) | 25,916) | 22,722) | 89,449) | 88,073) | 93,513) | |
| Operating Liabilities | |||||||
| Total liabilities | 35,261) | 36,321) | 32,899) | 78,731) | 76,079) | 78,020) | |
| Less: Notes payable and short-term borrowings | 1,463) | 1,072) | 78) | 2,885) | 3,486) | 5,979) | |
| Less: Long-term debt, excluding current portion | 4,524) | 6,747) | 6,758) | 21,780) | 16,039) | 16,608) | |
| Operating liabilities | 29,274) | 28,502) | 26,063) | 54,066) | 56,554) | 55,433) | |
| Net operating assets1 | 182) | (2,586) | (3,341) | 35,383) | 31,519) | 38,080) | |
| Balance-sheet-based aggregate accruals2 | 2,768) | 755) | (38,724) | 3,864) | (6,561) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | — | — | -241.71% | 11.55% | -18.85% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Apple Inc. | — | — | — | — | — | — | |
| Arista Networks Inc. | — | — | — | — | — | — | |
| Cisco Systems Inc. | — | — | — | — | — | — | |
| Dell Technologies Inc. | — | — | — | — | — | — | |
| Lumentum Holdings Inc. | — | — | — | — | — | — | |
| Super Micro Computer Inc. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2018-10-31), 10-K (reporting date: 2017-10-31), 10-K (reporting date: 2016-10-31), 10-K (reporting date: 2015-10-31), 10-K (reporting date: 2014-10-31), 10-K (reporting date: 2013-10-31).
1 2018 Calculation
Net operating assets = Operating assets – Operating liabilities
= 29,456 – 29,274 = 182
2 2018 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2018 – Net operating assets2017
= 182 – -2,586 = 2,768
3 2018 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,768 ÷ [(182 + -2,586) ÷ 2] = —
4 Click competitor name to see calculations.
The financial data reveals significant volatility in balance-sheet-based accruals and net operating assets over the five-year period ending October 31, 2018. A pronounced shift in asset structure and reporting quality metrics is observed, particularly during the 2016 fiscal year, followed by a period of relative stabilization.
- Net Operating Assets (NOA)
- A sharp contraction in net operating assets occurred between 2015 and 2016, where values dropped from US$ 35,383 million to -US$ 3,341 million. This transition to a negative balance suggests a structural shift where operating liabilities exceeded operating assets. While NOA trended upward in subsequent years, reaching US$ 182 million by 2018, the levels remained substantially lower than those recorded in 2014 and 2015.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals exhibited extreme instability. After moving from negative US$ 6,561 million in 2014 to positive US$ 3,864 million in 2015, a significant negative spike was recorded in 2016 at -US$ 38,724 million. This suggests a substantial divergence between reported earnings and cash flows during that period. By 2017 and 2018, accruals returned to positive values of US$ 755 million and US$ 2,768 million, respectively, indicating a normalization of reporting quality.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio reflects the underlying volatility of the balance sheet components. The ratio shifted from -18.85% in 2014 to 11.55% in 2015, before reaching an extreme outlier of -241.71% in 2016. This extreme negative percentage coincides with the precipitous drop in net operating assets, highlighting a period of high instability in the accruals-to-assets relationship.
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Cash-Flow-Statement-Based Accruals Ratio
HP Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Oct 31, 2018 | Oct 31, 2017 | Oct 31, 2016 | Oct 31, 2015 | Oct 31, 2014 | Oct 31, 2013 | ||
|---|---|---|---|---|---|---|---|
| Net earnings | 5,327) | 2,526) | 2,496) | 4,554) | 5,013) | 5,113) | |
| Less: Net cash provided by operating activities | 4,528) | 3,677) | 3,230) | 6,490) | 12,333) | 11,608) | |
| Less: Net cash (used in) provided by investing activities | (716) | (1,717) | 48) | (5,534) | (2,792) | (2,803) | |
| Cash-flow-statement-based aggregate accruals | 1,515) | 566) | (782) | 3,598) | (4,528) | (3,692) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | — | — | -4.88% | 10.76% | -13.01% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Apple Inc. | — | — | — | — | — | — | |
| Arista Networks Inc. | — | — | — | — | — | — | |
| Cisco Systems Inc. | — | — | — | — | — | — | |
| Dell Technologies Inc. | — | — | — | — | — | — | |
| Lumentum Holdings Inc. | — | — | — | — | — | — | |
| Super Micro Computer Inc. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2018-10-31), 10-K (reporting date: 2017-10-31), 10-K (reporting date: 2016-10-31), 10-K (reporting date: 2015-10-31), 10-K (reporting date: 2014-10-31), 10-K (reporting date: 2013-10-31).
1 2018 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,515 ÷ [(182 + -2,586) ÷ 2] = —
2 Click competitor name to see calculations.
The financial reporting quality indicators demonstrate substantial volatility in both asset structure and accrual levels from 2014 through 2018. A primary observation is the drastic contraction of net operating assets occurring between the 2015 and 2016 fiscal years, which fundamentally altered the financial positioning of the entity.
- Net Operating Assets
- Net operating assets peaked at 35,383 million US dollars in 2015 before dropping precipitously to -3,341 million US dollars in 2016. This sharp decline suggests a major structural reorganization or significant asset divestiture. Following this shift, the balance remained relatively low, trending slightly upward to 182 million US dollars by 2018.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals exhibited an inconsistent pattern, shifting from a negative 4,528 million US dollars in 2014 to a positive 3,598 million US dollars in 2015. Following a decrease to -782 million US dollars in 2016, a steady upward trend emerged, with accruals increasing to 566 million US dollars in 2017 and reaching 1,515 million US dollars by 2018.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio fluctuated significantly during the initial three years of the observed period. A negative ratio of -13.01% in 2014 shifted to 10.76% in 2015, before returning to a negative -4.88% in 2016. These oscillations indicate a fluctuating divergence between reported accounting earnings and actual cash flow generation during the period of structural transition.
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