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
Lockheed Martin Corp., 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 | 55,617) | 52,456) | 52,880) | 50,873) | 50,710) | |
| Less: Cash and cash equivalents | 2,483) | 1,442) | 2,547) | 3,604) | 3,160) | |
| Operating assets | 53,134) | 51,014) | 50,333) | 47,269) | 47,550) | |
| Operating Liabilities | ||||||
| Total liabilities | 49,284) | 45,621) | 43,614) | 39,914) | 44,672) | |
| Less: Current maturities of long-term debt | 643) | 168) | 118) | 6) | 500) | |
| Less: Long-term debt, net, excluding current portion | 19,627) | 17,291) | 15,429) | 11,670) | 11,669) | |
| Operating liabilities | 29,014) | 28,162) | 28,067) | 28,238) | 32,503) | |
| Net operating assets1 | 24,120) | 22,852) | 22,266) | 19,031) | 15,047) | |
| Balance-sheet-based aggregate accruals2 | 1,268) | 586) | 3,235) | 3,984) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 5.40% | 2.60% | 15.67% | 23.38% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Boeing Co. | 21.29% | -22.39% | -12.09% | 30.23% | — | |
| Caterpillar Inc. | 1.20% | 9.40% | 1.82% | 4.22% | — | |
| Eaton Corp. plc | -0.49% | 2.18% | 2.87% | 10.92% | — | |
| GE Aerospace | -10.31% | -50.58% | -7.82% | -33.29% | — | |
| Honeywell International Inc. | 30.89% | 7.21% | -1.99% | 9.04% | — | |
| RTX Corp. | -1.06% | -1.23% | 1.57% | 1.48% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Capital Goods | 4.71% | -5.90% | -0.33% | -0.06% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | 4.97% | -1.04% | 0.29% | 3.43% | — | |
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
= 53,134 – 29,014 = 24,120
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 24,120 – 22,852 = 1,268
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,268 ÷ [(24,120 + 22,852) ÷ 2] = 5.40%
4 Click competitor name to see calculations.
The data indicates several key trends in the annual financial reporting quality measures over the observed four-year period.
- Net Operating Assets
- There is a consistent upward trend in net operating assets, increasing from 19,031 million US dollars in 2021 to 24,120 million US dollars in 2024. This growth suggests that the company has been steadily expanding its operating asset base throughout the period, which could be reflective of ongoing business growth or increased investment in operational capacity.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals show a decreasing trend from 3,984 million US dollars in 2021 to a low of 586 million US dollars in 2023, followed by an increase to 1,268 million US dollars in 2024. This decline and subsequent rise indicate fluctuations in non-cash components of earnings, with a notable reduction in accruals until 2023 and a partial reversal in the last year.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, follows a similar trend as aggregate accruals. It decreases significantly from 23.38% in 2021 to 2.6% in 2023, indicating a substantial reduction in the proportion of accruals relative to net operating assets. However, the ratio rises again to 5.4% in 2024, suggesting an increased reliance on accruals compared to the previous year, although still well below the initial level in 2021.
Overall, the data reflect increasing net operating assets alongside a marked reduction in accrual-based measures through the middle of the period, followed by a slight pickup in accruals in the latest year. Such patterns could point to improved financial reporting quality through reduced accruals, with some moderation in this trend in 2024. These changes in accruals may impact the assessment of earnings quality and warrant further investigation into the underlying operational or accounting factors driving these accrual variations.
Cash-Flow-Statement-Based Accruals Ratio
Lockheed Martin Corp., 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 earnings | 5,336) | 6,920) | 5,732) | 6,315) | 6,833) | |
| Less: Net cash provided by operating activities | 6,972) | 7,920) | 7,802) | 9,221) | 8,183) | |
| Less: Net cash used for investing activities | (1,792) | (1,694) | (1,789) | (1,161) | (2,010) | |
| Cash-flow-statement-based aggregate accruals | 156) | 694) | (281) | (1,745) | 660) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 0.66% | 3.08% | -1.36% | -10.24% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Boeing Co. | 57.20% | -26.69% | -50.32% | -43.09% | — | |
| Caterpillar Inc. | 2.39% | 6.90% | 3.26% | 5.38% | — | |
| Eaton Corp. plc | -1.02% | 8.52% | 4.55% | 7.52% | — | |
| GE Aerospace | 5.07% | -8.42% | -15.92% | -53.22% | — | |
| Honeywell International Inc. | 28.68% | 5.80% | -0.79% | 2.16% | — | |
| RTX Corp. | -0.87% | -1.66% | 0.87% | -1.96% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Capital Goods | 8.44% | -0.94% | -5.98% | -13.86% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | 5.29% | 1.67% | -2.31% | -8.91% | — | |
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 × 156 ÷ [(24,120 + 22,852) ÷ 2] = 0.66%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets consistently increased over the analyzed period, moving from 19,031 million USD at the end of 2021 to 24,120 million USD by the end of 2024. This upward trend indicates growth in operating assets, suggesting an expansion in operational capacity or investment in long-term assets over these years.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals exhibited significant fluctuations within the period. In 2021, the measure was notably negative at -1,745 million USD, which sharply improved to -281 million USD in 2022. Subsequently, it turned positive at 694 million USD in 2023 and declined to a smaller positive figure of 156 million USD in 2024. This shift from negative to positive accruals suggests changes in the timing or recognition of revenues and expenses relative to cash flows, signaling possible adjustments in accounting practices or operational cash management.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrored the pattern observed in aggregate accruals, starting at -10.24% in 2021 and increasing towards near zero in 2022 (-1.36%). It became positive in 2023 (3.08%) before declining to 0.66% in 2024. The initial negative values indicate that accruals were detracting from cash flow in the earlier years, while the positive values in later years suggest accruals contributed positively to cash flow. The ratio's moderation in 2024 implies stabilization in accruals relative to operating cash flows.