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
Royal Caribbean Cruises Ltd., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 32,258,355) | 32,465,187) | 30,320,284) | 27,698,270) | 22,296,317) | |
| Less: Cash and cash equivalents | 2,701,770) | 3,684,474) | 243,738) | 287,852) | 120,112) | |
| Operating assets | 29,556,585) | 28,780,713) | 30,076,546) | 27,410,418) | 22,176,205) | |
| Operating Liabilities | ||||||
| Total liabilities | 27,172,799) | 23,704,518) | 17,586,457) | 16,050,789) | 11,594,014) | |
| Less: Current portion of long-term debt | 2,243,131) | 961,768) | 1,186,586) | 1,646,841) | 1,188,514) | |
| Less: Commercial paper | —) | 409,319) | 1,434,180) | 775,488) | —) | |
| Less: Long-term debt, excluding current portion | 18,847,209) | 17,957,956) | 8,414,110) | 8,355,370) | 6,350,937) | |
| Operating liabilities | 6,082,459) | 4,375,475) | 6,551,581) | 5,273,090) | 4,054,563) | |
| Net operating assets1 | 23,474,126) | 24,405,238) | 23,524,965) | 22,137,328) | 18,121,642) | |
| Balance-sheet-based aggregate accruals2 | (931,112) | 880,273) | 1,387,637) | 4,015,686) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -3.89% | 3.67% | 6.08% | 19.95% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Airbnb Inc. | — | — | — | — | — | |
| Booking Holdings Inc. | — | — | — | — | — | |
| Chipotle Mexican Grill Inc. | — | — | — | — | — | |
| DoorDash, Inc. | — | — | — | — | — | |
| McDonald’s Corp. | — | — | — | — | — | |
| Starbucks Corp. | -25.79% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Consumer Services | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Discretionary | 200.00% | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= 29,556,585 – 6,082,459 = 23,474,126
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 23,474,126 – 24,405,238 = -931,112
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -931,112 ÷ [(23,474,126 + 24,405,238) ÷ 2] = -3.89%
4 Click competitor name to see calculations.
A consistent downward trend in balance-sheet-based aggregate accruals and the corresponding accruals ratio is observed between 2018 and 2021. While net operating assets remained relatively stable over the four-year period, the accruals component experienced a significant contraction, eventually shifting from a positive to a negative value.
- Net Operating Assets Trend
- Net operating assets exhibited moderate growth from December 31, 2018, to December 31, 2020, rising from 22,137,328 thousand USD to a peak of 24,405,238 thousand USD. A subsequent contraction occurred by December 31, 2021, with values returning to 23,474,126 thousand USD, indicating a period of asset expansion followed by a slight consolidation.
- Aggregate Accruals Analysis
- Balance-sheet-based aggregate accruals demonstrated a sharp and continuous decline. Starting at 4,015,686 thousand USD in 2018, the figures dropped substantially to 1,387,637 thousand USD in 2019 and further to 880,273 thousand USD in 2020. By December 31, 2021, aggregate accruals transitioned into negative territory, reaching -931,112 thousand USD.
- Accruals Ratio and Reporting Quality
- The balance-sheet-based accruals ratio mirrors the decline seen in aggregate accruals, falling from 19.95% in 2018 to -3.89% in 2021. This precipitous decline suggests a fundamental shift in the relationship between reported earnings and cash flows. The transition from a high positive ratio to a negative ratio indicates a reduction in non-cash earnings components, which typically correlates with an increase in the quality of financial reporting as earnings become more closely aligned with, or exceeded by, cash realizations.
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Cash-Flow-Statement-Based Accruals Ratio
Royal Caribbean Cruises Ltd., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to Royal Caribbean Cruises Ltd. | (5,260,499) | (5,797,462) | 1,878,887) | 1,811,042) | 1,625,133) | |
| Less: Net cash provided by (used in) operating activities | (1,877,815) | (3,731,653) | 3,716,366) | 3,479,139) | 2,874,566) | |
| Less: Net cash used in investing activities | (2,144,739) | (2,178,566) | (3,091,406) | (4,489,158) | (213,592) | |
| Cash-flow-statement-based aggregate accruals | (1,237,945) | 112,757) | 1,253,927) | 2,821,061) | (1,035,841) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -5.17% | 0.47% | 5.49% | 14.01% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Airbnb Inc. | — | — | — | — | — | |
| Booking Holdings Inc. | — | — | — | — | — | |
| Chipotle Mexican Grill Inc. | — | — | — | — | — | |
| DoorDash, Inc. | — | — | — | — | — | |
| McDonald’s Corp. | — | — | — | — | — | |
| Starbucks Corp. | -47.73% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Consumer Services | -11.08% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Discretionary | 21.63% | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,237,945 ÷ [(23,474,126 + 24,405,238) ÷ 2] = -5.17%
2 Click competitor name to see calculations.
A consistent downward trend in the cash-flow-statement-based accruals ratio is observed from 2018 through 2021. This trajectory indicates a significant shift in the relationship between accrual-based earnings and actual cash flows relative to the company's net operating assets.
- Cash-Flow-Statement-Based Accruals Ratio
- The ratio experienced a substantial and continuous decline, falling from 14.01% in 2018 to -5.17% in 2021. This progression suggests an improvement in the quality of reported earnings, as the gap between accrual earnings and cash flow narrowed and eventually inverted. The transition to a negative ratio by 2021 indicates that cash flows from operations exceeded accrual-based operating income during that period.
- Aggregate Accruals
- The absolute value of aggregate accruals decreased sharply over the four-year period. Starting at 2.82 billion US dollars in 2018, the figure dropped to 1.25 billion in 2019, further diminished to 112.8 million in 2020, and ultimately became negative at -1.24 billion US dollars in 2021. This reversal reflects a move away from high levels of non-cash earnings toward a cash-surplus position relative to accruals.
- Net Operating Assets
- Net operating assets remained relatively stable compared to the volatility seen in accruals. These assets grew from 22.14 billion US dollars in 2018 to a peak of 24.41 billion in 2020, before slightly contracting to 23.47 billion in 2021. The stability of the asset base underscores that the decline in the accruals ratio was driven primarily by the reduction in aggregate accruals rather than a significant expansion of the operating asset base.
The convergence of these trends highlights a period of significant adjustment in financial reporting quality. The shift from a high positive accruals ratio to a negative one typically suggests that earnings are increasingly backed by cash, reducing the reliance on accounting estimates and accruals to support reported performance.
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