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
Johnson Controls International plc, balance sheet computation of aggregate accruals
US$ in millions
| Sep 30, 2023 | Sep 30, 2022 | Sep 30, 2021 | Sep 30, 2020 | Sep 30, 2019 | Sep 30, 2018 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 42,242) | 42,158) | 41,890) | 40,815) | 42,287) | 48,797) | |
| Less: Cash and cash equivalents | 835) | 2,031) | 1,336) | 1,951) | 2,805) | 200) | |
| Operating assets | 41,407) | 40,127) | 40,554) | 38,864) | 39,482) | 48,597) | |
| Operating Liabilities | |||||||
| Total liabilities | 24,548) | 24,756) | 23,137) | 22,282) | 21,458) | 26,339) | |
| Less: Short-term debt | 385) | 669) | 8) | 31) | 10) | 1,315) | |
| Less: Current portion of long-term debt | 645) | 865) | 226) | 262) | 501) | 26) | |
| Less: Long-term debt, less current portion | 7,818) | 7,426) | 7,506) | 7,526) | 6,708) | 9,654) | |
| Operating liabilities | 15,700) | 15,796) | 15,397) | 14,463) | 14,239) | 15,344) | |
| Net operating assets1 | 25,707) | 24,331) | 25,157) | 24,401) | 25,243) | 33,253) | |
| Balance-sheet-based aggregate accruals2 | 1,376) | (826) | 756) | (842) | (8,010) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 5.50% | -3.34% | 3.05% | -3.39% | -27.39% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Boeing Co. | -22.39% | -12.09% | — | — | — | — | |
| Caterpillar Inc. | 9.40% | 1.82% | — | — | — | — | |
| Eaton Corp. plc | 2.18% | 2.87% | — | — | — | — | |
| GE Aerospace | -50.58% | -7.82% | — | — | — | — | |
| Honeywell International Inc. | 7.21% | -1.99% | — | — | — | — | |
| Lockheed Martin Corp. | 2.60% | 15.67% | — | — | — | — | |
| RTX Corp. | -1.23% | 1.57% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Capital Goods | -5.90% | -0.33% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Industrials | -0.83% | 0.67% | 200.00% | — | — | — | |
Based on: 10-K (reporting date: 2023-09-30), 10-K (reporting date: 2022-09-30), 10-K (reporting date: 2021-09-30), 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 41,407 – 15,700 = 25,707
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 25,707 – 24,331 = 1,376
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,376 ÷ [(25,707 + 24,331) ÷ 2] = 5.50%
4 Click competitor name to see calculations.
The analysis of the financial reporting quality for the period ending September 30, 2019, through September 30, 2023, reveals a period of significant volatility in aggregate accruals contrasted against a stable base of net operating assets.
- Net Operating Assets
- Net operating assets have remained consistently stable over the five-year observation period, fluctuating within a narrow range between 24,331 million US$ and 25,707 million US$. This stability indicates that the company's underlying operating asset base has not undergone drastic structural changes, providing a consistent denominator for the calculation of the accruals ratio.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals exhibited substantial variance, starting at a significant negative value of -8,010 million US$ in 2019. This figure trended upward toward zero in 2020 (-842 million US$) and shifted into positive territory by 2021 (756 million US$). After a brief return to negative values in 2022 (-826 million US$), accruals reached a five-year peak of 1,376 million US$ in 2023.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio followed a mirrored trajectory to the aggregate accruals, moving from a deeply negative -27.39% in 2019 to a positive 5.50% in 2023. The high negative ratio in 2019 suggests that cash flows significantly exceeded accrual-based earnings during that period. From 2020 to 2022, the ratio stabilized within a tight band between -3.39% and 3.05%. The shift to 5.50% in 2023 represents the highest positive accrual level in the data set, indicating an increase in the proportion of earnings derived from non-cash accruals relative to the net operating assets.
Overall, the trend reflects a transition from a high-quality earnings profile characterized by significant negative accruals in 2019 to a more neutralized and eventually positive accrual position by 2023. While the ratio remains relatively low in absolute terms, the upward trajectory suggests a change in the timing of cash flow recognition relative to reported earnings.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
Without a user account, I tend to respond rather slowly.
How can I help you?
Cash-Flow-Statement-Based Accruals Ratio
Johnson Controls International plc, cash flow statement computation of aggregate accruals
US$ in millions
| Sep 30, 2023 | Sep 30, 2022 | Sep 30, 2021 | Sep 30, 2020 | Sep 30, 2019 | Sep 30, 2018 | ||
|---|---|---|---|---|---|---|---|
| Net income attributable to Johnson Controls | 1,849) | 1,532) | 1,637) | 631) | 5,674) | 2,162) | |
| Less: Cash provided by operating activities from continuing operations | 2,221) | 1,990) | 2,551) | 2,479) | 1,743) | 2,513) | |
| Less: Cash (used) provided by investing activities from continuing operations | (1,184) | (693) | (1,090) | (258) | (533) | 1,215) | |
| Cash-flow-statement-based aggregate accruals | 812) | 235) | 176) | (1,590) | 4,464) | (1,566) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 3.25% | 0.95% | 0.71% | -6.41% | 15.26% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Boeing Co. | -26.69% | -50.32% | — | — | — | — | |
| Caterpillar Inc. | 6.90% | 3.26% | — | — | — | — | |
| Eaton Corp. plc | 8.52% | 4.55% | — | — | — | — | |
| GE Aerospace | -8.42% | -15.92% | — | — | — | — | |
| Honeywell International Inc. | 5.80% | -0.79% | — | — | — | — | |
| Lockheed Martin Corp. | 3.08% | -1.36% | — | — | — | — | |
| RTX Corp. | -1.66% | 0.87% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Capital Goods | -0.94% | -5.98% | -27.73% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Industrials | 1.66% | -2.30% | -17.51% | — | — | — | |
Based on: 10-K (reporting date: 2023-09-30), 10-K (reporting date: 2022-09-30), 10-K (reporting date: 2021-09-30), 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 812 ÷ [(25,707 + 24,331) ÷ 2] = 3.25%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality from 2019 to 2023 reveals a significant shift in the relationship between reported earnings and cash flows. While net operating assets remained relatively stable throughout the period, the aggregate accruals and the resulting accruals ratio exhibited substantial volatility, indicating a transition in the composition of earnings.
- Net Operating Assets Stability
- Net operating assets maintained a consistent range between US$ 24.3 billion and US$ 25.7 billion over the five-year period. The lack of significant expansion or contraction in the asset base suggests that the fluctuations observed in accruals are not driven by major changes in the scale of the company's operating infrastructure.
- Aggregate Accruals Trend
- A sharp reversal is observed in cash-flow-statement-based aggregate accruals. The period began with a peak of US$ 4,464 million in 2019, followed by a steep decline to a negative US$ 1,590 million in 2020. From 2021 onward, accruals returned to positive territory, showing a steady upward trajectory from US$ 176 million in 2021 to US$ 812 million in 2023.
- Accruals Ratio and Earnings Quality
- The accruals ratio demonstrates a pronounced normalization process. The high ratio of 15.26% in 2019 suggests that a significant portion of earnings was comprised of non-cash components. This was followed by a sharp swing to -6.41% in 2020, indicating that cash flows exceeded reported accrual-based earnings. Between 2021 and 2023, the ratio stabilized at low positive levels, moving from 0.71% to 3.25%. This trend suggests a period of higher earnings quality, as the gap between cash flow and reported earnings narrowed significantly compared to the 2019 baseline.
Overall, the data indicates a transition from a high-accrual environment in 2019 to a more cash-aligned earnings profile in subsequent years. The convergence of the accruals ratio toward a low positive percentage suggests that reported operating performance is more closely supported by cash movements in the most recent fiscal periods.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
Without a user account, I tend to respond rather slowly.
How can I help you?