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% | — | — | — | — | |
| Caterpillar Inc. | 1.82% | — | — | — | — | |
| Eaton Corp. plc | 2.87% | — | — | — | — | |
| GE Aerospace | -7.82% | — | — | — | — | |
| Honeywell International Inc. | -1.99% | — | — | — | — | |
| Lockheed Martin Corp. | 15.67% | — | — | — | — | |
| RTX Corp. | 1.57% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Capital Goods | -0.33% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | 0.67% | 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.
The financial reporting quality metrics for the period between 2019 and 2022 exhibit a marked increase in balance-sheet-based accruals relative to net operating assets. A transition from negative accruals to a sharply ascending positive trend indicates a growing divergence between reported accounting earnings and actual cash flows.
- Net Operating Assets
- A consistent upward trend in net operating assets is observed, increasing from US$ 20,453 million in 2019 to US$ 25,612 million in 2022. The most significant growth occurred between 2021 and 2022, reflecting a substantial expansion of the company's operating asset base.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals underwent a significant reversal and expansion over the four-year period. Starting at negative US$ 555 million in 2019, the value shifted to positive territory by 2020 at US$ 222 million, subsequently accelerating to US$ 1,504 million in 2021 and US$ 3,433 million by 2022. This trajectory suggests an increasing reliance on non-cash accruals to support reported earnings.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio reflects a sharp positive slope, moving from -2.68% in 2019 to 14.37% in 2022. The transition from a negative ratio in 2019 to a high positive percentage by 2022 signifies a shift in earnings quality, where reported earnings are increasingly decoupled from cash flow. The rapid escalation from 7.02% in 2021 to 14.37% in 2022 is particularly notable, indicating that a larger proportion of the operating asset growth is attributed to accruals.
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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% | — | — | — | — | |
| Caterpillar Inc. | 3.26% | — | — | — | — | |
| Eaton Corp. plc | 4.55% | — | — | — | — | |
| GE Aerospace | -15.92% | — | — | — | — | |
| Honeywell International Inc. | -0.79% | — | — | — | — | |
| Lockheed Martin Corp. | -1.36% | — | — | — | — | |
| RTX Corp. | 0.87% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Capital Goods | -5.98% | -27.73% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | -2.30% | -17.51% | — | — | — | |
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.
A consistent upward trajectory is observed in the scale of net operating assets and the magnitude of aggregate accruals from 2019 through 2022. The divergence between accrual-based accounting and cash flow has widened significantly over this period, indicating a shift in the composition of reported earnings.
- Net Operating Assets Trend
- Net operating assets exhibited steady growth, increasing from 20,453 million USD in 2019 to 25,612 million USD by 2022. While the growth between 2019 and 2020 was marginal, there was a more pronounced acceleration in asset accumulation during 2021 and 2022, with the most significant year-over-year increase occurring in the final period.
- Aggregate Accruals Movement
- Cash-flow-statement-based aggregate accruals shifted from a negative position of -842 million USD in 2019 to a substantial positive value of 3,236 million USD in 2022. This transition from negative to positive accruals indicates that the gap between reported earnings and cash flow from operations reversed and then expanded rapidly.
- Accruals Ratio Analysis
- The cash-flow-statement-based accruals ratio mirrors the trend in aggregate accruals, rising from -4.06% in 2019 to 13.54% in 2022. The shift into positive territory in 2020 (0.46%) followed by a steep climb in 2021 (6.44%) and 2022 (13.54%) suggests that a growing portion of the reported earnings is derived from non-cash accruals rather than cash realizations. Such a trend typically signals a decrease in the quality of earnings as the reliance on accounting estimates and deferrals increases relative to the asset base.
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