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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National Oilwell Varco Inc. pages available for free this week:
- Income Statement
- Statement of Comprehensive Income
- Balance Sheet: Liabilities and Stockholders’ Equity
- Common-Size Balance Sheet: Assets
- Analysis of Short-term (Operating) Activity Ratios
- Common Stock Valuation Ratios
- Enterprise Value (EV)
- Selected Financial Data since 2005
- Net Profit Margin since 2005
- Price to Operating Profit (P/OP) since 2005
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Balance-Sheet-Based Accruals Ratio
National Oilwell Varco Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current portion of long-term debt and short-term borrowings | ||||||
| Less: Long-term debt, excluding current portion | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Schlumberger Ltd. | ||||||
Based on: 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31), 10-K (reporting date: 2011-12-31).
1 2015 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2015 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2015 – Net operating assets2014
= – =
3 2015 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 show a declining trend over the four-year period. Starting at 20,186 million US dollars at the end of 2012, the figure increased slightly to 22,044 million in 2013, but then decreased to 20,402 million in 2014 and further declined to 18,310 million by the end of 2015. This indicates a reduction in the company's investment in net operating assets after 2013.
- Balance-sheet-based Aggregate Accruals
- There is a notable shift in the balance-sheet-based aggregate accruals from positive to negative values across the reviewed period. The accruals started at a high positive level of 5,483 million US dollars in 2012, dropped sharply to 1,858 million in 2013, then turned negative, recording -1,642 million in 2014 and further decreasing to -2,092 million by 2015. This significant change suggests a reduced reliance on accruals or possible changes in earnings management practices.
- Balance-sheet-based Accruals Ratio
- The accruals ratio follows a similar downward pattern, moving from 31.43% in 2012 to 8.8% in 2013, before becoming negative and reaching -7.74% in 2014 and -10.81% in 2015. The initial high ratio indicates a substantial portion of net operating assets was represented by accruals in 2012, but this proportion diminished rapidly and turned negative, reflecting a reversal or significant change in accrual activities relative to net operating assets.
Cash-Flow-Statement-Based Accruals Ratio
National Oilwell Varco Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to Company | ||||||
| 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 | ||||||
| Schlumberger Ltd. | ||||||
Based on: 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31), 10-K (reporting date: 2011-12-31).
1 2015 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
- There is a declining trend in net operating assets over the four-year period. The value decreased from 20,186 million US dollars at the end of 2012 to 18,310 million US dollars by the end of 2015. After an initial rise in 2013 to 22,044 million dollars, the value declined in subsequent years.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals show a significant downward movement throughout the period. Starting at 5,299 million US dollars in 2012, the values dropped sharply in 2013 and 2014, reaching as low as -1,587 million US dollars in 2015. This indicates a shift from positive to negative accruals.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio follows a similar declining pattern. It started at 30.38% in 2012, then fell considerably in the following years to 8.97% in 2013 and 5.04% in 2014, ultimately turning negative at -8.2% in 2015. This suggests improving cash flow quality or reduced accruals relative to net operating assets toward the end of the period.
- Overall Summary
- The data reflect a general decline in net operating assets and aggregate accruals over the four-year span, with a notable transition to negative accruals in 2015. The decreasing accruals ratio points to enhanced cash flow reliability in the latest period, which might indicate improved financial reporting quality or operational cash flow performance. However, the reduction in net operating assets may warrant further examination into asset management or economic conditions impacting the company.