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.
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Mosaic Co. pages available for free this week:
- Balance Sheet: Liabilities and Stockholders’ Equity
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Liquidity Ratios
- Analysis of Geographic Areas
- Enterprise Value (EV)
- Capital Asset Pricing Model (CAPM)
- Operating Profit Margin since 2005
- Return on Equity (ROE) since 2005
- Total Asset Turnover since 2005
- Price to Book Value (P/BV) since 2005
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Balance-Sheet-Based Accruals Ratio
Mosaic Co., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term debt | ||||||
| Less: Current maturities of long-term debt | ||||||
| Less: Structured accounts payable arrangements | ||||||
| Less: Long-term debt, less current maturities | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Linde plc | ||||||
| Sherwin-Williams Co. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Chemicals | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Materials | ||||||
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= – =
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited a fluctuating but overall stable trend over the four-year period. Starting at approximately $14.86 billion in 2018, the figure decreased to $14.20 billion in 2019, experienced a slight increase to $14.40 billion in 2020, and rose again to $15.00 billion in 2021. This indicates a moderate growth trajectory after a dip in 2019.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals showed significant volatility throughout the period. There was a notable negative value in 2019, with accruals reaching -$655.4 million, reversing from a positive $1.76 billion in 2018. In subsequent years, the accruals returned to positive values but at much reduced levels, recorded as approximately $196 million in 2020 and $605 million in 2021. This variability suggests changes in the company's accounting estimations or cash flow timing that impacted reported earnings.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, mirrored the volatility seen in aggregate accruals. The ratio was relatively high at 12.59% in 2018, fell sharply to -4.51% in 2019 indicating a reversal, then settled at a low positive level of 1.37% in 2020 and increased to 4.12% in 2021. The sharp swing from positive to negative and back to positive levels indicates inconsistent earnings quality related to accrual accounting components during these years.
Cash-Flow-Statement-Based Accruals Ratio
Mosaic Co., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net earnings (loss) attributable to Mosaic | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash used in investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Linde plc | ||||||
| Sherwin-Williams Co. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Chemicals | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Materials | ||||||
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets showed a moderate fluctuation over the four-year period. Starting at approximately 14.86 billion USD at the end of 2018, the figure decreased to about 14.20 billion USD in 2019. In 2020, a slight increase occurred, reaching approximately 14.40 billion USD, followed by a more notable rise to around 15.00 billion USD in 2021. This trend indicates a general recovery and growth in the company's operational asset base after a dip in 2019.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals displayed significant volatility across the observed years. Starting with a positive value of roughly 1.00 billion USD in 2018, the measure swung to a negative value of approximately -0.80 billion USD in 2019, suggesting a substantial reversal or adjustment in accruals. The following years saw a return to positive territory, with accruals increasing to 273 million USD in 2020 and further rising to about 766 million USD in 2021. This pattern indicates varying levels of non-cash adjustments within operational cash flows, with a notable recovery after 2019's negative accruals.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio exhibited a corresponding trend to the aggregate accruals, reflecting fluctuations in the quality of earnings as measured relative to net operating assets. Commencing at 7.19% in 2018, the ratio turned negative to -5.52% in 2019, indicating a deterioration in accrual-based earnings quality that year. Recovery ensued with the ratio rising to 1.91% in 2020 and further to 5.21% in 2021. Overall, these movements suggest temporal challenges in accrual quality, with improvement in later years, which may imply better alignment between cash flows and earnings.