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
Marathon Petroleum Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 85,987) | 89,904) | 85,373) | 85,158) | 98,556) | |
| Less: Cash and cash equivalents | 5,443) | 8,625) | 5,291) | 415) | 1,527) | |
| Less: Short-term investments | 4,781) | 3,145) | 5,548) | —) | —) | |
| Operating assets | 75,763) | 78,134) | 74,534) | 84,743) | 97,029) | |
| Operating Liabilities | ||||||
| Total liabilities | 54,588) | 54,817) | 51,792) | 54,938) | 55,449) | |
| Less: Debt due within one year | 1,954) | 1,066) | 571) | 2,854) | 711) | |
| Less: Long-term debt due after one year | 25,329) | 25,634) | 24,968) | 28,730) | 28,127) | |
| Operating liabilities | 27,305) | 28,117) | 26,253) | 23,354) | 26,611) | |
| Net operating assets1 | 48,458) | 50,017) | 48,281) | 61,389) | 70,418) | |
| Balance-sheet-based aggregate accruals2 | (1,559) | 1,736) | (13,108) | (9,029) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -3.17% | 3.53% | -23.90% | -13.70% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | 5.21% | 0.03% | — | — | — | |
| ConocoPhillips | 10.61% | -5.86% | — | — | — | |
| Exxon Mobil Corp. | 3.91% | -1.19% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | 5.28% | -1.34% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Energy | 5.39% | -1.05% | 200.00% | — | — | |
Based on: 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), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 75,763 – 27,305 = 48,458
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 48,458 – 50,017 = -1,559
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,559 ÷ [(48,458 + 50,017) ÷ 2] = -3.17%
4 Click competitor name to see calculations.
Net operating assets experienced a significant contraction between 2020 and 2021, decreasing from US$ 61,389 million to US$ 48,281 million. Following this decline, the asset base remained relatively stable, fluctuating slightly to end at US$ 48,458 million by December 31, 2023.
- Balance-sheet-based aggregate accruals
- Aggregate accruals exhibited substantial volatility over the four-year period. A strong negative trend was observed in 2020 and 2021, with values reaching -US$ 9,029 million and -US$ 13,108 million, respectively. This trend reversed sharply in 2022 as accruals turned positive at US$ 1,736 million, before returning to a negative value of -US$ 1,559 million in 2023.
- Balance-sheet-based accruals ratio
- The accruals ratio shifted from -13.70% in 2020 to a deeper negative of -23.90% in 2021, indicating a period where cash flow from operations substantially exceeded reported accounting earnings. A significant pivot occurred in 2022, with the ratio moving into positive territory at 3.53%. By December 31, 2023, the ratio stabilized at -3.17%. The predominance of negative ratios across the majority of the analyzed period suggests a general trend of high earnings quality, as accruals did not consistently inflate reported net income relative to cash flow.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
How can I help you?
Cash-Flow-Statement-Based Accruals Ratio
Marathon Petroleum Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to MPC | 9,681) | 14,516) | 9,738) | (9,826) | 2,637) | |
| Less: Net cash provided by operating activities | 14,117) | 16,319) | 8,384) | 807) | 9,441) | |
| Less: Net cash (used in) provided by investing activities | (3,095) | 623) | (6,517) | (2,922) | (6,261) | |
| Cash-flow-statement-based aggregate accruals | (1,341) | (2,426) | 7,871) | (7,711) | (543) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -2.72% | -4.94% | 14.35% | -11.70% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Chevron Corp. | 0.58% | -1.22% | — | — | — | |
| ConocoPhillips | 5.11% | -1.56% | — | — | — | |
| Exxon Mobil Corp. | -0.04% | -2.93% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | 0.87% | -2.11% | -10.40% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Energy | 0.89% | -1.75% | -10.60% | — | — | |
Based on: 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), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,341 ÷ [(48,458 + 50,017) ÷ 2] = -2.72%
2 Click competitor name to see calculations.
The analysis of the cash-flow-statement-based accruals ratio reveals a period of significant volatility followed by a trend toward stabilization. This metric, which serves as a proxy for financial reporting quality by comparing reported earnings to actual cash flows, indicates a fluctuating relationship between accounting profits and cash generation from 2020 through 2023.
- Net Operating Assets
- A general downward trend in net operating assets is observed, decreasing from 61,389 million US dollars in 2020 to 48,458 million US dollars by 2023. The most pronounced contraction occurred between 2020 and 2021, after which the asset base remained relatively stable, fluctuating within a narrow range between 48 billion and 50 billion US dollars.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals exhibited sharp reversals in direction over the four-year period. A negative value of -7,711 million US dollars in 2020 swung to a positive 7,871 million US dollars in 2021. This trend reversed again in 2022 and 2023, with values of -2,426 million and -1,341 million US dollars, respectively, showing a gradual convergence toward zero.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrors the volatility of the aggregate accruals, shifting from -11.70% in 2020 to a peak of 14.35% in 2021. This spike suggests a period where non-cash earnings significantly exceeded cash flows. However, the ratio returned to negative territory in 2022 (-4.94%) and further moderated to -2.72% in 2023. The persistence of negative ratios in the final two years indicates that cash flows from operations exceeded reported accrual-based earnings, which is typically associated with higher earnings quality.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
How can I help you?