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
Hubbell Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 5,402,600) | 5,281,500) | 5,085,100) | 4,903,000) | 4,872,100) | |
| Less: Cash and cash equivalents | 440,500) | 286,200) | 259,600) | 182,000) | 189,000) | |
| Less: Short-term investments | 14,300) | 9,400) | 9,300) | 14,200) | 9,200) | |
| Operating assets | 4,947,800) | 4,985,900) | 4,816,200) | 4,706,800) | 4,673,900) | |
| Operating Liabilities | ||||||
| Total liabilities | 3,032,000) | 3,040,800) | 2,999,700) | 2,942,500) | 3,073,200) | |
| Less: Short-term debt and current portion of long-term debt | 4,700) | 9,700) | 153,100) | 65,400) | 56,100) | |
| Less: Long-term debt, excluding current portion | 1,437,900) | 1,435,500) | 1,436,900) | 1,506,000) | 1,737,100) | |
| Operating liabilities | 1,589,400) | 1,595,600) | 1,409,700) | 1,371,100) | 1,280,000) | |
| Net operating assets1 | 3,358,400) | 3,390,300) | 3,406,500) | 3,335,700) | 3,393,900) | |
| Balance-sheet-based aggregate accruals2 | (31,900) | (16,200) | 70,800) | (58,200) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -0.95% | -0.48% | 2.10% | -1.73% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Boeing Co. | -12.09% | — | — | — | — | |
| Caterpillar Inc. | 1.82% | — | — | — | — | |
| Eaton Corp. plc | 2.87% | — | — | — | — | |
| GE Aerospace | -7.82% | — | — | — | — | |
| Honeywell International Inc. | -1.99% | — | — | — | — | |
| Lockheed Martin Corp. | 15.67% | — | — | — | — | |
| RTX Corp. | 1.57% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Capital Goods | -0.33% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | 0.67% | 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
= 4,947,800 – 1,589,400 = 3,358,400
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 3,358,400 – 3,390,300 = -31,900
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -31,900 ÷ [(3,358,400 + 3,390,300) ÷ 2] = -0.95%
4 Click competitor name to see calculations.
An analysis of financial reporting quality from 2019 to 2022 reveals a pattern of low-magnitude fluctuations in the balance-sheet-based accruals ratio, suggesting a relatively stable relationship between reported earnings and cash flow relative to the asset base.
- Net Operating Assets Stability
- Net operating assets remained consistently stable over the four-year period, fluctuating within a narrow range between US$ 3.33 billion and US$ 3.41 billion. A slight peak occurred in 2020 at US$ 3,406,500 thousand, followed by a marginal decline to US$ 3,358,400 thousand by the end of 2022. This stability indicates that the denominator of the accruals ratio remained constant, meaning changes in the ratio are driven primarily by fluctuations in aggregate accruals.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals exhibited significant volatility in direction, shifting between negative and positive values. The period began with negative accruals of US$ -58,200 thousand in 2019, reversed to a positive US$ 70,800 thousand in 2020, and returned to negative territory in 2021 and 2022, ending at US$ -31,900 thousand. These shifts indicate alternating periods where cash flow exceeded reported earnings and vice versa.
- Accruals Ratio Interpretation
- The balance-sheet-based accruals ratio mirrored the volatility of the aggregate accruals, moving from -1.73% in 2019 to a peak of 2.10% in 2020, before moderating to -0.48% in 2021 and -0.95% in 2022. The prevalence of negative ratios in three of the four years suggests a general tendency toward conservative accounting, where cash flows from operations typically exceeded accrual-based earnings. The low absolute values of these ratios—all remaining below 3%—indicate that accruals represent a small fraction of the total net operating assets, which is generally associated with higher earnings quality and lower risk of significant accounting distortions.
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Cash-Flow-Statement-Based Accruals Ratio
Hubbell Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Hubbell Incorporated | 545,900) | 399,500) | 351,200) | 400,900) | 360,200) | |
| Less: Net cash provided by operating activities | 636,200) | 513,700) | 648,000) | 591,600) | 517,100) | |
| Less: Net cash (used in) provided by investing activities | 18,100) | (72,100) | (328,800) | (128,900) | (1,201,400) | |
| Cash-flow-statement-based aggregate accruals | (108,400) | (42,100) | 32,000) | (61,800) | 1,044,500) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -3.21% | -1.24% | 0.95% | -1.84% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Boeing Co. | -50.32% | — | — | — | — | |
| Caterpillar Inc. | 3.26% | — | — | — | — | |
| Eaton Corp. plc | 4.55% | — | — | — | — | |
| GE Aerospace | -15.92% | — | — | — | — | |
| Honeywell International Inc. | -0.79% | — | — | — | — | |
| Lockheed Martin Corp. | -1.36% | — | — | — | — | |
| RTX Corp. | 0.87% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Capital Goods | -5.98% | -27.73% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | -2.30% | -17.51% | — | — | — | |
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 × -108,400 ÷ [(3,358,400 + 3,390,300) ÷ 2] = -3.21%
2 Click competitor name to see calculations.
The analysis of financial reporting quality from 2019 to 2022 reveals a general trend of negative accruals, suggesting that cash flows have largely exceeded accrual-based earnings over the period. This pattern typically indicates high earnings quality and a conservative accounting approach.
- Net Operating Assets
- Net operating assets remained remarkably stable throughout the four-year period, fluctuating within a narrow range between 3.33 billion and 3.41 billion US dollars. The peak occurred in 2020 at 3,406,500 thousand US dollars, followed by a slight contraction to 3,358,400 thousand US dollars by the end of 2022.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals exhibited volatility, shifting from a negative position of -61,800 thousand US dollars in 2019 to a positive 32,000 thousand US dollars in 2020. However, a downward trajectory resumed in subsequent years, with accruals becoming increasingly negative, reaching -108,400 thousand US dollars in 2022.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrors the trend of aggregate accruals, starting at -1.84% in 2019 and shifting to 0.95% in 2020. From 2021 onward, the ratio declined consistently, moving to -1.24% and then to -3.21% in 2022. The expansion of this negative ratio indicates an increasing divergence where cash flow performance exceeds reported accrual earnings, which is generally interpreted as a sign of robust reporting quality.
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