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
Hess Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 21,695) | 20,515) | 18,821) | 21,782) | 21,433) | |
| Less: Cash and cash equivalents | 2,486) | 2,713) | 1,739) | 1,545) | 2,694) | |
| Operating assets | 19,209) | 17,802) | 17,082) | 20,237) | 18,739) | |
| Operating Liabilities | ||||||
| Total liabilities | 13,199) | 13,489) | 12,486) | 12,076) | 10,545) | |
| Less: Current portion of long-term debt | 3) | 517) | 10) | —) | 67) | |
| Less: Current portion of finance lease obligations | 21) | 19) | 18) | 17) | —) | |
| Less: Long-term debt, excluding current portion | 8,278) | 7,941) | 8,286) | 7,142) | 6,605) | |
| Less: Long-term finance lease obligations | 179) | 200) | 220) | 238) | —) | |
| Operating liabilities | 4,718) | 4,812) | 3,952) | 4,679) | 3,873) | |
| Net operating assets1 | 14,491) | 12,990) | 13,130) | 15,558) | 14,866) | |
| Balance-sheet-based aggregate accruals2 | 1,501) | (140) | (2,428) | 692) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 10.92% | -1.07% | -16.93% | 4.55% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | 0.03% | — | — | — | — | |
| ConocoPhillips | -5.86% | — | — | — | — | |
| ExxonMobil Holdings Corp. | -1.19% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | -1.34% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Energy | -1.05% | 200.00% | — | — | — | |
Based on: 10-K (reporting date: 2022-12-31), 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).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 19,209 – 4,718 = 14,491
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 14,491 – 12,990 = 1,501
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,501 ÷ [(14,491 + 12,990) ÷ 2] = 10.92%
4 Click competitor name to see calculations.
The financial reporting quality, as measured by the balance-sheet-based accruals ratio, exhibits significant volatility between 2019 and 2022. The fluctuations in aggregate accruals relative to net operating assets suggest substantial shifts in the relationship between reported earnings and cash flow generation over this four-year period.
- Net Operating Assets Trend
- Net operating assets experienced a contraction starting in 2020, declining from 15,558 million US dollars in 2019 to a low of 12,990 million US dollars in 2021. A reversal of this trend occurred in 2022, with assets increasing to 14,491 million US dollars, indicating a recovery in the operational asset base.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals shifted from a positive 692 million US dollars in 2019 to a sharp negative of 2,428 million US dollars in 2020. This was followed by a near-neutral position of -140 million US dollars in 2021 and a significant swing back to positive territory, reaching 1,501 million US dollars in 2022. This oscillation indicates inconsistent patterns in how non-cash accounting adjustments have impacted the balance sheet.
- Accruals Ratio Analysis
- The accruals ratio reflects high variability in earnings quality. The ratio dropped from 4.55% in 2019 to -16.93% in 2020, suggesting that cash flows significantly exceeded accrual-based earnings during that period. The ratio then normalized toward -1.07% in 2021 before spiking to 10.92% in 2022. The 2022 increase indicates a higher proportion of earnings derived from accruals rather than cash, which typically warrants closer scrutiny regarding the sustainability of reported profits.
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Cash-Flow-Statement-Based Accruals Ratio
Hess Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to Hess Corporation | 2,096) | 559) | (3,093) | (408) | (282) | |
| Less: Net cash provided by operating activities | 3,944) | 2,890) | 1,333) | 1,642) | 1,939) | |
| Less: Net cash used in investing activities | (2,555) | (1,325) | (1,707) | (2,843) | (1,566) | |
| Cash-flow-statement-based aggregate accruals | 707) | (1,006) | (2,719) | 793) | (655) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 5.15% | -7.70% | -18.96% | 5.21% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Chevron Corp. | -1.22% | — | — | — | — | |
| ConocoPhillips | -1.56% | — | — | — | — | |
| ExxonMobil Holdings Corp. | -2.93% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | -2.11% | -10.40% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Energy | -1.75% | -10.60% | — | — | — | |
Based on: 10-K (reporting date: 2022-12-31), 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).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 707 ÷ [(14,491 + 12,990) ÷ 2] = 5.15%
2 Click competitor name to see calculations.
The financial performance from 2019 to 2022 is characterized by significant volatility in accrual levels and net operating assets, with a pronounced downturn in 2020 followed by a steady recovery toward baseline levels by the end of 2022.
- Net Operating Assets
- A contraction is observed in net operating assets, which fell from US$ 15,558 million in 2019 to US$ 13,130 million in 2020, reaching a period low of US$ 12,990 million in 2021. A reversal of this trend occurred in 2022, as assets increased to US$ 14,491 million.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals experienced a sharp transition from a positive US$ 793 million in 2019 to a significant negative US$ 2,719 million in 2020. While the figure remained negative in 2021 at US$ 1,006 million, it returned to a positive position of US$ 707 million by the close of 2022.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrored the volatility of aggregate accruals, shifting from 5.21% in 2019 to -18.96% in 2020. The ratio moderated to -7.70% in 2021 before normalizing to 5.15% in 2022. The negative ratios recorded during 2020 and 2021 indicate that cash flows from operations exceeded accrual-based earnings, suggesting a period of high non-cash charges or conservative accounting treatments, while the return to a positive ratio in 2022 aligns with the levels seen at the start of the analyzed period.
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