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.
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Honeywell International Inc. pages available for free this week:
- Common-Size Balance Sheet: Assets
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Common Stock Valuation Ratios
- Price to FCFE (P/FCFE)
- Dividend Discount Model (DDM)
- Present Value of Free Cash Flow to Equity (FCFE)
- Price to Earnings (P/E) since 2005
- Price to Book Value (P/BV) since 2005
- Price to Sales (P/S) since 2005
- Analysis of Revenues
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Balance-Sheet-Based Accruals Ratio
Honeywell International Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Short-term investments | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Commercial paper and other short-term borrowings | ||||||
| Less: Current maturities of long-term debt | ||||||
| Less: Long-term debt, excluding current maturities | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Boeing Co. | ||||||
| Caterpillar Inc. | ||||||
| Eaton Corp. plc | ||||||
| GE Aerospace | ||||||
| Lockheed Martin Corp. | ||||||
| RTX Corp. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Capital Goods | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | ||||||
Based on: 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= – =
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited a relatively stable trend from 2021 to 2023, with values fluctuating moderately between approximately US$26,786 million and US$28,789 million. However, in 2024, there was a marked increase to US$39,307 million, indicating a substantial expansion of operating assets during this period.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals showed notable variability over the years, starting at US$2,364 million in 2021, declining sharply to a negative value of -US$539 million in 2022, which suggests a reversal or reduction in accruals for that year. Subsequently, accruals resumed a positive trend with US$2,003 million in 2023, followed by a significant spike to US$10,518 million in 2024, signaling a considerable increase in accruals activity towards the end of the period.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrored the pattern observed in aggregate accruals. It began at 9.04% in 2021, dropped to -1.99% in 2022, reflecting the negative accruals previously noted. The ratio then rose to 7.21% in 2023 and surged dramatically to 30.89% in 2024. This sharp increase in 2024 points to a considerable rise in accruals relative to net operating assets, which may suggest a change in earnings quality or accounting policies impacting the financial statements during that year.
Cash-Flow-Statement-Based Accruals Ratio
Honeywell International Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Honeywell | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash used for investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Boeing Co. | ||||||
| Caterpillar Inc. | ||||||
| Eaton Corp. plc | ||||||
| GE Aerospace | ||||||
| Lockheed Martin Corp. | ||||||
| RTX Corp. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Capital Goods | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | ||||||
Based on: 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited a generally increasing trend over the reported periods. Beginning at 27,325 million US dollars in the first period, the value slightly declined to 26,786 million US dollars in the next period. Subsequently, it rose to 28,789 million US dollars in the following period and then surged significantly to 39,307 million US dollars by the last period. This pattern indicates a notable expansion in net operating assets, particularly in the most recent interval.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals based on the cash flow statement showed considerable fluctuation over time. Initially, there was a positive value of 565 million US dollars, which turned negative to -215 million in the second period, indicating a reduction or adjustment in accruals. The subsequent periods showed a strong rebound with values increasing sharply to 1,611 million and then escalating significantly to 9,765 million US dollars by the final period. This sharp increase suggests growing accruals, potentially reflecting increased adjustments between operating profits and cash flows.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrored the volatility seen in the aggregate accruals. Starting at a positive 2.16%, the ratio shifted to a negative -0.79% in the second period, indicating a period of negative accruals relative to cash flows. This ratio then rose markedly to 5.8% in the third period and experienced a pronounced leap to 28.68% in the final period. The substantial increase in this ratio in the last reporting period may point to a significant divergence between accrual accounting measures and cash flows, warranting further investigation into the drivers of this change.