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
Hewlett Packard Enterprise Co., balance sheet computation of aggregate accruals
US$ in millions
| Oct 31, 2023 | Oct 31, 2022 | Oct 31, 2021 | Oct 31, 2020 | Oct 31, 2019 | Oct 31, 2018 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 57,153) | 57,123) | 57,699) | 54,015) | 51,803) | 55,493) | |
| Less: Cash and cash equivalents | 4,270) | 4,163) | 3,996) | 4,233) | 3,753) | 4,880) | |
| Operating assets | 52,883) | 52,960) | 53,703) | 49,782) | 48,050) | 50,613) | |
| Operating Liabilities | |||||||
| Total liabilities | 35,915) | 37,214) | 37,682) | 37,919) | 34,654) | 34,219) | |
| Less: Notes payable and short-term borrowings | 4,868) | 4,612) | 3,552) | 3,755) | 4,425) | 2,005) | |
| Less: Long-term debt | 7,487) | 7,853) | 9,896) | 12,186) | 9,395) | 10,136) | |
| Operating liabilities | 23,560) | 24,749) | 24,234) | 21,978) | 20,834) | 22,078) | |
| Net operating assets1 | 29,323) | 28,211) | 29,469) | 27,804) | 27,216) | 28,535) | |
| Balance-sheet-based aggregate accruals2 | 1,112) | (1,258) | 1,665) | 588) | (1,319) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 3.87% | -4.36% | 5.81% | 2.14% | -4.73% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Apple Inc. | -9.04% | -2.12% | — | — | — | — | |
| Arista Networks Inc. | 17.14% | 106.22% | — | — | — | — | |
| Cisco Systems Inc. | -12.09% | 5.96% | — | — | — | — | |
| Dell Technologies Inc. | 12.16% | -89.81% | — | — | — | — | |
| Lumentum Holdings Inc. | 56.73% | -0.44% | — | — | — | — | |
| Super Micro Computer Inc. | 3.74% | 58.35% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Technology Hardware & Equipment | -6.32% | -13.26% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Information Technology | 8.81% | 19.09% | 200.00% | — | — | — | |
Based on: 10-K (reporting date: 2023-10-31), 10-K (reporting date: 2022-10-31), 10-K (reporting date: 2021-10-31), 10-K (reporting date: 2020-10-31), 10-K (reporting date: 2019-10-31), 10-K (reporting date: 2018-10-31).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 52,883 – 23,560 = 29,323
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 29,323 – 28,211 = 1,112
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,112 ÷ [(29,323 + 28,211) ÷ 2] = 3.87%
4 Click competitor name to see calculations.
The analysis of financial reporting quality over the five-year period ending October 31, 2023, reveals significant volatility in the relationship between reported earnings and cash flows, despite a relatively stable base of net operating assets.
- Net Operating Assets Trend
- Net operating assets remained relatively consistent, fluctuating within a range of approximately US$ 27.2 billion to US$ 29.5 billion. A gradual increase was observed from 2019 through 2021, followed by a slight contraction in 2022 and a subsequent recovery to US$ 29.3 billion by October 31, 2023. This stability indicates that the underlying operational scale remained steady during the period analyzed.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals exhibited substantial oscillations, shifting between negative and positive values annually. The figures moved from a negative US$ 1,319 million in 2019 to a peak positive of US$ 1,665 million in 2021, before dropping to negative US$ 1,258 million in 2022, and returning to positive US$ 1,112 million in 2023. Such fluctuations suggest a recurring divergence between accrual-based accounting earnings and actual cash flow generation.
- Accruals Ratio Analysis
- The balance-sheet-based accruals ratio closely mirrored the volatility of aggregate accruals. The ratio fluctuated from a low of -4.73% in 2019 to a high of 5.81% in 2021, followed by a drop to -4.36% in 2022, and ending at 3.87% in 2023. The presence of alternating positive and negative ratios indicates periods where cash flows exceeded earnings (negative accruals) and periods where earnings exceeded cash flows (positive accruals).
- Financial Reporting Quality Implications
- The lack of a consistent trend in the accruals ratio suggests that reporting quality has been subject to periodic shifts. The spike in 2021 suggests a higher reliance on non-cash earnings components, whereas the negative ratios in 2019 and 2022 point toward more conservative reporting or stronger cash flow relative to reported profits. The return to a positive ratio of 3.87% in 2023 indicates a renewed gap between accruals and cash flow.
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Cash-Flow-Statement-Based Accruals Ratio
Hewlett Packard Enterprise Co., cash flow statement computation of aggregate accruals
US$ in millions
| Oct 31, 2023 | Oct 31, 2022 | Oct 31, 2021 | Oct 31, 2020 | Oct 31, 2019 | Oct 31, 2018 | ||
|---|---|---|---|---|---|---|---|
| Net earnings (loss) attributable to HPE | 2,025) | 868) | 3,427) | (322) | 1,049) | 1,908) | |
| Less: Net cash provided by operating activities | 4,428) | 4,593) | 5,871) | 2,240) | 3,997) | 2,964) | |
| Less: Net cash used in investing activities | (3,284) | (2,087) | (2,796) | (2,578) | (3,457) | (2,071) | |
| Cash-flow-statement-based aggregate accruals | 881) | (1,638) | 352) | 16) | 509) | 1,015) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 3.06% | -5.68% | 1.23% | 0.06% | 1.83% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Apple Inc. | -14.62% | 0.00% | — | — | — | — | |
| Arista Networks Inc. | 36.37% | 52.90% | — | — | — | — | |
| Cisco Systems Inc. | -7.65% | -10.18% | — | — | — | — | |
| Dell Technologies Inc. | 11.23% | -20.97% | — | — | — | — | |
| Lumentum Holdings Inc. | 33.53% | -2.83% | — | — | — | — | |
| Super Micro Computer Inc. | 0.89% | 56.84% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Technology Hardware & Equipment | -9.60% | -4.09% | -1.64% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Information Technology | 1.37% | 3.25% | 15.65% | — | — | — | |
Based on: 10-K (reporting date: 2023-10-31), 10-K (reporting date: 2022-10-31), 10-K (reporting date: 2021-10-31), 10-K (reporting date: 2020-10-31), 10-K (reporting date: 2019-10-31), 10-K (reporting date: 2018-10-31).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 881 ÷ [(29,323 + 28,211) ÷ 2] = 3.06%
2 Click competitor name to see calculations.
The financial reporting quality over the five-year period ending October 31, 2023, is characterized by a relatively stable base of net operating assets contrasted with significant volatility in aggregate accruals and their corresponding ratios. While net operating assets exhibited a gradual upward trend, the accruals metrics showed sharp fluctuations, indicating varying degrees of divergence between reported earnings and operational cash flows.
- Net Operating Assets Trend
- Net operating assets grew from 27,216 million US dollars in 2019 to 29,323 million US dollars in 2023. This growth was largely consistent, with a peak of 29,469 million US dollars in 2021, suggesting a stable expansion of the operational asset base.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals demonstrated substantial instability. After a low of 16 million US dollars in 2020, the figure rose to 352 million US dollars in 2021, before plummeting to a significant negative 1,638 million US dollars in 2022. A sharp reversal occurred in 2023, with accruals returning to a positive 881 million US dollars.
- Accruals Ratio Analysis
- The accruals ratio mirrors the volatility of the aggregate accruals. The ratio remained relatively low and positive between 2019 and 2021, ranging from 0.06% to 1.83%. The 2022 fiscal year represents a notable outlier with a ratio of -5.68%, implying that cash flows significantly exceeded net income during that period. This trend reversed in 2023, with the ratio climbing to 3.06%, the highest level in the observed period, indicating that net income exceeded cash flows by a larger margin relative to the asset base.
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