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
Parker-Hannifin Corp., balance sheet computation of aggregate accruals
US$ in thousands
| Jun 30, 2022 | Jun 30, 2021 | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2018 | Jun 30, 2017 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 25,943,943) | 20,341,200) | 19,738,189) | 17,576,690) | 15,320,087) | 15,489,904) | |
| Less: Cash and cash equivalents | 535,799) | 733,117) | 685,514) | 3,219,767) | 822,137) | 884,886) | |
| Less: Marketable securities and other investments | 27,862) | 39,116) | 70,805) | 150,931) | 32,995) | 39,318) | |
| Operating assets | 25,380,282) | 19,568,967) | 18,981,870) | 14,205,992) | 14,464,955) | 14,565,700) | |
| Operating Liabilities | |||||||
| Total liabilities | 17,084,023) | 11,927,530) | 13,609,660) | 11,608,538) | 9,454,594) | 10,222,558) | |
| Less: Notes payable and long-term debt payable within one year | 1,724,310) | 2,824) | 809,529) | 587,014) | 638,466) | 1,008,465) | |
| Less: Long-term debt, excluding payable within one year | 9,755,825) | 6,582,053) | 7,652,256) | 6,520,831) | 4,318,559) | 4,861,895) | |
| Operating liabilities | 5,603,888) | 5,342,653) | 5,147,875) | 4,500,693) | 4,497,569) | 4,352,198) | |
| Net operating assets1 | 19,776,394) | 14,226,314) | 13,833,995) | 9,705,299) | 9,967,386) | 10,213,502) | |
| Balance-sheet-based aggregate accruals2 | 5,550,080) | 392,319) | 4,128,696) | (262,087) | (246,116) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 32.64% | 2.80% | 35.08% | -2.66% | -2.44% | — | |
| 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: 2022-06-30), 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30), 10-K (reporting date: 2019-06-30), 10-K (reporting date: 2018-06-30), 10-K (reporting date: 2017-06-30).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 25,380,282 – 5,603,888 = 19,776,394
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 19,776,394 – 14,226,314 = 5,550,080
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 5,550,080 ÷ [(19,776,394 + 14,226,314) ÷ 2] = 32.64%
4 Click competitor name to see calculations.
- Net Operating Assets
- Net operating assets demonstrated a fluctuating upward trend over the five-year period. Starting from approximately 9.97 billion US dollars in mid-2018, there was a slight decline in 2019 to about 9.71 billion. However, from 2020 onwards, the metric showed significant growth, reaching over 19.77 billion by mid-2022. This represents substantial asset expansion, particularly notable in the last two years of the period.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals experienced high volatility during the timeframe. Negative values were recorded in 2018 and 2019, indicating outflows or reversals amounting to roughly -246 million and -262 million US dollars respectively. In 2020, there was a dramatic shift to a large positive value exceeding 4.1 billion, followed by a sharp decrease in 2021 to around 392 million. The accumulation surged again in 2022, reaching approximately 5.55 billion US dollars, highlighting significant fluctuations year over year in the accrual components of the balance sheet.
- Balance-sheet-based Accruals Ratio
- The accruals ratio mirrored the volatility seen in aggregate accruals. Initially negative in 2018 and 2019, at -2.44% and -2.66% respectively, the ratio spiked sharply to 35.08% in 2020. This was followed by a sharp decline in 2021 to 2.80%, and then another substantial increase to 32.64% in 2022. These swings suggest periods of markedly different earnings quality and potential changes in accounting estimates or accrual policies influencing the financial reporting quality across these years.
Cash-Flow-Statement-Based Accruals Ratio
Parker-Hannifin Corp., cash flow statement computation of aggregate accruals
US$ in thousands
| Jun 30, 2022 | Jun 30, 2021 | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2018 | Jun 30, 2017 | ||
|---|---|---|---|---|---|---|---|
| Net income attributable to common shareholders | 1,315,605) | 1,746,100) | 1,206,341) | 1,512,364) | 1,060,801) | 983,412) | |
| Less: Net cash provided by operating activities | 2,441,730) | 2,575,001) | 2,070,949) | 1,730,140) | 1,600,287) | 1,302,471) | |
| Less: Net cash (used in) provided by investing activities | (418,837) | (13) | (5,023,993) | (218,510) | 20,090) | (3,365,148) | |
| Cash-flow-statement-based aggregate accruals | (707,288) | (828,888) | 4,159,385) | 734) | (559,576) | 3,046,089) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | -4.16% | -5.91% | 35.34% | 0.01% | -5.55% | — | |
| 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: 2022-06-30), 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30), 10-K (reporting date: 2019-06-30), 10-K (reporting date: 2018-06-30), 10-K (reporting date: 2017-06-30).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -707,288 ÷ [(19,776,394 + 14,226,314) ÷ 2] = -4.16%
2 Click competitor name to see calculations.
- Net operating assets
- The net operating assets demonstrated an overall upward trend from June 30, 2018, to June 30, 2022. The value increased from approximately 9.97 billion US dollars in 2018 to nearly 19.78 billion US dollars in 2022. Notably, there was a significant rise between 2019 and 2020, where the figure jumped from around 9.71 billion to approximately 13.83 billion US dollars. This upward momentum continued, albeit more moderately, through 2021, followed by another substantial increase by mid-2022.
- Cash-flow-statement-based aggregate accruals
- The aggregate accruals, measured in thousands of US dollars, exhibited considerable variability across the time span. The figure started negative at about -560 million in mid-2018, representing a cash inflow from accruals, then moved near to zero in 2019. A pronounced spike occurred in mid-2020, with aggregate accruals peaking at approximately 4.16 billion, indicating a large cash outflow due to accruals. However, this was followed by a reversal to negative territory in 2021 and 2022, reflecting a return to cash-inflow conditions related to accruals but at smaller absolute values compared to earlier periods.
- Cash-flow-statement-based accruals ratio
- The accruals ratio reflected the same volatility, peaking dramatically at 35.34% in 2020, up from near zero in the prior year. This sharp increase suggests that accruals represented a significant proportion of net operating assets at that time. Subsequently, the ratio moved back to negative values in 2021 and 2022, specifically -5.91% and -4.16%, respectively. The negative ratios in these two years indicate accruals contributed positively to cash flows relative to net operating assets, contrasting with the substantial ratio spike seen in 2020.