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
Northrop Grumman Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 43,755) | 42,579) | 44,469) | 41,089) | 37,653) | |
| Less: Cash and cash equivalents | 2,577) | 3,530) | 4,907) | 2,245) | 1,579) | |
| Operating assets | 41,178) | 39,049) | 39,562) | 38,844) | 36,074) | |
| Operating Liabilities | ||||||
| Total liabilities | 28,443) | 29,653) | 33,890) | 32,270) | 29,466) | |
| Less: Current portion of long-term debt | 1,072) | 6) | 742) | 1,109) | 517) | |
| Less: Long-term debt, net of current portion | 11,805) | 12,777) | 14,261) | 12,770) | 13,883) | |
| Operating liabilities | 15,566) | 16,870) | 18,887) | 18,391) | 15,066) | |
| Net operating assets1 | 25,612) | 22,179) | 20,675) | 20,453) | 21,008) | |
| Balance-sheet-based aggregate accruals2 | 3,433) | 1,504) | 222) | (555) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 14.37% | 7.02% | 1.08% | -2.68% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Boeing Co. | -12.09% | 30.23% | — | — | — | |
| Caterpillar Inc. | 1.82% | 4.22% | — | — | — | |
| Eaton Corp. plc | 2.87% | 10.92% | — | — | — | |
| GE Aerospace | -7.82% | -33.29% | — | — | — | |
| Honeywell International Inc. | -1.99% | 9.04% | — | — | — | |
| Lockheed Martin Corp. | 15.67% | 23.38% | — | — | — | |
| RTX Corp. | 1.57% | 1.48% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Capital Goods | -0.33% | -0.06% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | 0.29% | 3.43% | 200.00% | — | — | |
Based on: 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), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 41,178 – 15,566 = 25,612
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 25,612 – 22,179 = 3,433
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 3,433 ÷ [(25,612 + 22,179) ÷ 2] = 14.37%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets demonstrated a consistent upward trend over the four-year period, increasing from 20,453 million US dollars in 2019 to 25,612 million US dollars in 2022. This growth represents a steady expansion in the company's asset base tied to its operations.
- Balance-sheet-based Aggregate Accruals
- The balance-sheet-based aggregate accruals exhibited significant variability and an increasing magnitude. In 2019, the accruals were negative at -555 million US dollars, shifted to a modest positive amount of 222 million in 2020, then rose sharply to 1,504 million in 2021, and further escalated to 3,433 million in 2022. This pattern indicates a material increase in accruals over time, with a pronounced acceleration in the latter years.
- Balance-sheet-based Accruals Ratio
- The accruals ratio followed a corresponding escalating trend, starting from -2.68% in 2019, moving to 1.08% in 2020, then climbing to 7.02% in 2021, and culminating at 14.37% in 2022. This reflects an increasing proportion of accruals relative to net operating assets, suggesting a growing reliance on accrual accounting elements in the financial reporting during the period analyzed.
- Overall Observations
- Collectively, the data reveals a trajectory of expanding net operating assets alongside rising accruals and accrual ratios. The marked growth in accruals, both in absolute terms and as a percentage of net operating assets, may warrant closer monitoring as it could impact the quality and sustainability of reported earnings. The upward accrual trend might suggest more aggressive earnings management or changes in operational dynamics influencing accrual levels.
Cash-Flow-Statement-Based Accruals Ratio
Northrop Grumman Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net earnings | 4,896) | 7,005) | 3,189) | 2,248) | 3,229) | |
| Less: Net cash provided by operating activities | 2,901) | 3,567) | 4,305) | 4,297) | 3,827) | |
| Less: Net cash (used in) provided by investing activities | (1,241) | 2,058) | (1,211) | (1,207) | (8,878) | |
| Cash-flow-statement-based aggregate accruals | 3,236) | 1,380) | 95) | (842) | 8,280) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 13.54% | 6.44% | 0.46% | -4.06% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Boeing Co. | -50.32% | -43.09% | — | — | — | |
| Caterpillar Inc. | 3.26% | 5.38% | — | — | — | |
| Eaton Corp. plc | 4.55% | 7.52% | — | — | — | |
| GE Aerospace | -15.92% | -53.22% | — | — | — | |
| Honeywell International Inc. | -0.79% | 2.16% | — | — | — | |
| Lockheed Martin Corp. | -1.36% | -10.24% | — | — | — | |
| RTX Corp. | 0.87% | -1.96% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Capital Goods | -5.98% | -13.86% | -3.12% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | -2.31% | -8.91% | -5.18% | — | — | |
Based on: 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), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 3,236 ÷ [(25,612 + 22,179) ÷ 2] = 13.54%
2 Click competitor name to see calculations.
The analysis of the financial data over the four-year period reveals distinct and notable trends in net operating assets and cash-flow-statement-based accruals for the company.
- Net operating assets
- The net operating assets consistently increased each year, starting at US$20,453 million at the end of 2019 and rising to US$25,612 million by the end of 2022. This steady growth suggests an expansion in the company’s operational base and investment in asset-intensive operations over the period analyzed.
- Cash-flow-statement-based aggregate accruals
- There is a clear upward trend in aggregate accruals, shifting from a negative value of -US$842 million in 2019 to a positive US$3,236 million by the end of 2022. The transition from negative to positive values implies a change in the company’s cash flow dynamics and potentially more aggressive revenue recognition or changes in working capital components.
- Cash-flow-statement-based accruals ratio
- The accruals ratio correlates with the aggregate accruals trend, starting from -4.06% in 2019 and progressively increasing to 13.54% in 2022. This rising ratio indicates that accruals form a growing proportion of net operating assets, which may indicate increasing earnings management risks or changes in accounting practices affecting the quality of earnings.
Overall, the data points to a company expanding its net operating assets while showing increasing accruals both in absolute terms and relative to net operating assets. These patterns warrant further examination to understand the underlying drivers and implications for financial reporting quality.