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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- Analysis of Liquidity Ratios
- Analysis of Short-term (Operating) Activity Ratios
- Analysis of Long-term (Investment) Activity Ratios
- Enterprise Value (EV)
- Enterprise Value to FCFF (EV/FCFF)
- Capital Asset Pricing Model (CAPM)
- Net Profit Margin since 2005
- Debt to Equity since 2005
- Price to Book Value (P/BV) since 2005
- Analysis of Revenues
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Balance-Sheet-Based Accruals Ratio
Pioneer Natural Resources Co., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Restricted cash | ||||||
| Less: Investment in affiliate | ||||||
| Less: Short-term investments, net | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current portion of debt | ||||||
| Less: Finance lease liability, current | ||||||
| Less: Long-term debt, excluding current portion | ||||||
| Less: Finance lease liability, noncurrent | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | ||||||
| ConocoPhillips | ||||||
| Exxon Mobil Corp. | ||||||
| Occidental Petroleum Corp. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Energy | ||||||
Based on: 10-K (reporting date: 2023-12-31), 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).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= – =
3 2023 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.
The analysis of the annual financial reporting quality measures reveals notable fluctuations and developments over the examined four-year period.
- Net Operating Assets
- The net operating assets increased consistently each year from December 31, 2020, through December 31, 2023. Starting at 13,801 million US dollars in 2020, the figure nearly doubled to 26,231 million US dollars in 2021, followed by incremental increases to 26,762 million in 2022 and 28,129 million in 2023. This upward trend indicates an expansion in operating asset base, possibly reflecting growth initiatives, acquisitions, or increased capital investment.
- Balance-Sheet-Based Aggregate Accruals
- The balance-sheet-based aggregate accruals exhibited significant volatility. In 2020, the measure was negative at -287 million US dollars, switching dramatically to a high positive value of 12,430 million US dollars in 2021. It then fell sharply to 531 million in 2022 before increasing again to 1,367 million in 2023. The substantial spike in 2021 followed by considerable decline suggests unusual or non-recurring items affecting accruals during that period, which may have implications for the quality of earnings and requires further investigation of underlying components.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrored the volatility seen in aggregate accruals. Starting at a negative 2.06% in 2020, it surged to an elevated 62.1% in 2021, reflecting the large accruals relative to net operating assets. This high ratio decreased significantly to 2.0% in 2022 and rose slightly to 4.98% in 2023. The extremely high ratio in 2021 indicates a departure from normal accrual patterns, potentially signaling reduced earnings quality or temporary financial statement effects during that year. Subsequent years show a reversion toward more typical levels, though the ratio remains above the 2020 baseline.
Overall, the data suggest a general growth in operating assets amidst notable fluctuations in accrual measures, particularly in 2021. The sharp changes in accrual figures and ratios imply episodic adjustments or anomalies affecting the accruals component, which may impact the reliability of reported earnings for that period. These patterns warrant closer scrutiny to assess their causes and implications for financial reporting quality.
Cash-Flow-Statement-Based Accruals Ratio
Pioneer Natural Resources Co., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to common stockholders | ||||||
| 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 | ||||||
| Chevron Corp. | ||||||
| ConocoPhillips | ||||||
| Exxon Mobil Corp. | ||||||
| Occidental Petroleum Corp. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Energy | ||||||
Based on: 10-K (reporting date: 2023-12-31), 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).
1 2023 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.
The data for the measure of financial reporting quality over the four-year period reveals several noteworthy trends.
- Net operating assets
- There is a consistent increase in net operating assets from 13,801 million USD at the end of 2020 to 28,129 million USD by the end of 2023. This represents a more than doubling over the period, indicating growth in the company’s asset base used in operations.
- Cash-flow-statement-based aggregate accruals
- The aggregate accruals show a significant negative value in 2020 (-615 million USD) that worsens substantially in 2021 (-3,072 million USD), then shifts to positive territory in 2022 (83 million USD) and increases further in 2023 (1,159 million USD). This pattern suggests a turnaround from a large negative accrual environment toward positive accruals over the last two years.
- Cash-flow-statement-based accruals ratio
- The accruals ratio starts at -4.41% in 2020, declining to -15.35% in 2021, which indicates a growing magnitude of accruals relative to cash flows and potential concerns about earnings quality in that year. Subsequently, the ratio turns positive in 2022 (0.31%) and increases to 4.22% in 2023. This movement from negative to positive ratios may reflect an improvement in the quality of reported earnings as cash-flow related accruals become less negatively skewed and then supportive of reported profits.
In summary, the data demonstrates growth in operating assets accompanied by a notable shift in accrual behavior, moving from higher negative accruals to positive accruals. This shift is reflected in the accruals ratio improving from negative to positive, which may indicate an enhancement in the financial reporting quality and alignment between accrual accounting earnings and cash flows over time.