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
Linde plc, balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 86,817) | 80,147) | 80,811) | 79,658) | 81,605) | |
| Less: Cash and cash equivalents | 5,056) | 4,850) | 4,664) | 5,436) | 2,823) | |
| Operating assets | 81,761) | 75,297) | 76,147) | 74,222) | 78,782) | |
| Operating Liabilities | ||||||
| Total liabilities | 47,076) | 40,659) | 39,716) | 38,271) | 36,164) | |
| Less: Short-term debt | 4,510) | 4,223) | 4,713) | 4,117) | 1,163) | |
| Less: Current portion of long-term debt | 1,796) | 2,057) | 1,263) | 1,599) | 1,709) | |
| Less: Current finance lease liabilities | 62) | 54) | 50) | 42) | 47) | |
| Less: Long-term debt, excluding current portion | 20,683) | 15,343) | 13,397) | 12,198) | 11,335) | |
| Less: Long-term finance lease liabilities | 152) | 150) | 143) | 114) | 129) | |
| Operating liabilities | 19,873) | 18,832) | 20,150) | 20,201) | 21,781) | |
| Net operating assets1 | 61,888) | 56,465) | 55,997) | 54,021) | 57,001) | |
| Balance-sheet-based aggregate accruals2 | 5,423) | 468) | 1,976) | (2,980) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 9.16% | 0.83% | 3.59% | -5.37% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Sherwin-Williams Co. | 10.48% | 4.62% | -1.37% | 12.51% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Chemicals | 9.43% | 1.57% | 2.62% | -2.04% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Materials | 9.36% | 3.19% | 5.47% | 1.53% | — | |
Based on: 10-K (reporting date: 2025-12-31), 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).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= 81,761 – 19,873 = 61,888
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= 61,888 – 56,465 = 5,423
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 5,423 ÷ [(61,888 + 56,465) ÷ 2] = 9.16%
4 Click competitor name to see calculations.
The balance-sheet-based accruals ratio exhibits a notable shift over the observed period. Initially negative, the ratio transitions to positive values, culminating in a substantial increase by the final year. This suggests evolving patterns in the relationship between net operating assets and aggregate accruals.
- Net Operating Assets
- Net operating assets demonstrate consistent growth throughout the period, increasing from US$54,021 million in 2022 to US$61,888 million in 2025. This indicates a general expansion of the company’s operational footprint.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals fluctuate significantly. Beginning at -US$2,980 million in 2022, they become positive in 2023 (US$1,976 million) and continue to increase, reaching US$5,423 million in 2025. This progression suggests a change in how the company recognizes revenues and expenses relative to cash flows.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio begins at -5.37% in 2022, indicating that net operating assets are decreasing faster than accruals are increasing. In 2023, the ratio shifts to 3.59%, signaling a reversal where accruals are growing faster than net operating assets. This trend continues, with the ratio reaching 0.83% in 2024 and a significant 9.16% in 2025. The substantial increase in the final year warrants further investigation, as a high positive accruals ratio can sometimes indicate potential earnings management or aggressive revenue recognition practices. However, it could also reflect legitimate changes in the business model or accounting policies.
The observed trend in the accruals ratio, moving from negative to significantly positive, suggests a fundamental change in the company’s financial reporting characteristics. While growth in net operating assets is consistent, the increasing accruals relative to those assets require further scrutiny to determine the underlying drivers and assess the quality of reported earnings.
AI Ask an analyst for more
Cash-Flow-Statement-Based Accruals Ratio
Linde plc, cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net income, Linde plc | 6,898) | 6,565) | 6,199) | 4,147) | 3,826) | |
| Less: Net cash provided by operating activities | 10,350) | 9,423) | 9,305) | 8,864) | 9,725) | |
| Less: Net cash used for investing activities | (5,721) | (4,644) | (4,670) | (3,088) | (3,007) | |
| Cash-flow-statement-based aggregate accruals | 2,269) | 1,786) | 1,564) | (1,629) | (2,892) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 3.83% | 3.18% | 2.84% | -2.93% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Sherwin-Williams Co. | 8.06% | 5.33% | -0.70% | 13.47% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Chemicals | 4.67% | 3.59% | 2.15% | 0.12% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Materials | 4.17% | 2.23% | 3.08% | 1.97% | — | |
Based on: 10-K (reporting date: 2025-12-31), 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).
1 2025 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,269 ÷ [(61,888 + 56,465) ÷ 2] = 3.83%
2 Click competitor name to see calculations.
The net operating assets exhibited a consistent upward trend over the four-year period, increasing from US$54,021 million in 2022 to US$61,888 million in 2025. Concurrently, the cash-flow-statement-based aggregate accruals demonstrated a significant shift from negative values to positive values, and an increasing magnitude over the same timeframe. This is reflected in the cash-flow-statement-based accruals ratio, which also showed a marked increase.
- Cash-Flow-Statement-Based Aggregate Accruals
- In 2022, cash-flow-statement-based aggregate accruals were negative, registering at -US$1,629 million. This indicates that, during that year, the company’s cash flow from operations was greater than its reported net income. However, from 2023 onwards, accruals became positive and increased year-over-year, reaching US$2,269 million in 2025. This suggests a growing divergence between net income and cash flow from operations, with reported income increasingly relying on accruals.
- Cash-Flow-Statement-Based Accruals Ratio
- The cash-flow-statement-based accruals ratio was -2.93% in 2022, consistent with the negative accruals. The ratio then turned positive in 2023 at 2.84%, and continued to rise to 3.18% in 2024 and 3.83% in 2025. This upward trajectory suggests an increasing reliance on accruals relative to net operating assets. A rising ratio may warrant further investigation into the quality of earnings, as it could indicate potential earnings management or aggressive accounting practices.
The combined trends suggest a changing relationship between reported earnings and underlying cash flows. While increasing net operating assets are generally positive, the growing positive accruals and accruals ratio require further scrutiny to assess the sustainability and quality of reported earnings.
AI Ask an analyst for more