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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- Statement of Comprehensive Income
- Balance Sheet: Liabilities and Stockholders’ Equity
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Profitability Ratios
- Analysis of Short-term (Operating) Activity Ratios
- Analysis of Long-term (Investment) Activity Ratios
- Common Stock Valuation Ratios
- Capital Asset Pricing Model (CAPM)
- Present Value of Free Cash Flow to Equity (FCFE)
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
SLB N.V., balance sheet computation of aggregate accruals
US$ in millions
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= – =
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
The balance-sheet-based accruals ratio exhibits significant fluctuation over the observed period. Net operating assets demonstrate a consistent upward trend, while aggregate accruals and the resulting accruals ratio display more volatile behavior.
- Net Operating Assets
- Net operating assets increased from US$27,321 million in 2022 to US$34,715 million in 2025. This represents a cumulative increase of approximately 27.1% over the four-year period, indicating consistent growth in the company’s operational asset base.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals increased substantially from US$979 million in 2022 to US$2,014 million in 2023, more than doubling within a single year. However, these accruals decreased significantly to US$420 million in 2024 before rising sharply again to US$4,960 million in 2025. This pattern suggests potential shifts in the timing of revenue and expense recognition, or changes in working capital management.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio followed a corresponding pattern to aggregate accruals. It rose from 3.65% in 2022 to 7.11% in 2023, then decreased to 1.42% in 2024. A substantial increase was observed in 2025, with the ratio reaching 15.39%. An accruals ratio significantly above 10% warrants further investigation, as it may indicate potential earnings manipulation or aggressive accounting practices. The large fluctuations observed raise questions about the consistency of earnings quality and the reliability of reported net income.
The divergence between the steady growth in net operating assets and the volatile accruals ratio suggests a need for closer scrutiny of the underlying accounting policies and their application. The substantial increase in the accruals ratio in 2025, in particular, merits detailed review to determine the drivers behind this change and assess its impact on the overall financial health of the entity.
Cash-Flow-Statement-Based Accruals Ratio
SLB N.V., cash flow statement computation of aggregate accruals
US$ in millions
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
Net operating assets exhibited a consistent increase over the four-year period, rising from 27,321 million US dollars in 2022 to 34,715 million US dollars in 2025. However, the cash-flow-statement-based aggregate accruals and the corresponding accruals ratio demonstrate significant fluctuations during the same timeframe.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals began at 1,109 million US dollars in 2022, representing a substantial contribution to net operating asset growth. A marked decrease was observed in 2023, with accruals falling to 349 million US dollars. Accruals partially recovered in 2024, reaching 1,004 million US dollars, but then experienced a substantial decline in 2025, resulting in negative accruals of -1,703 million US dollars. This indicates a reversal of previously recognized accruals and suggests a potential reduction in the reliance on accrual accounting to support reported earnings in the latest year.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrored the trend in aggregate accruals. It started at 4.13% in 2022, decreased significantly to 1.23% in 2023, increased to 3.40% in 2024, and then turned negative in 2025, reaching -5.28%. A negative accruals ratio suggests that cash flows from operations are exceeding reported earnings, or conversely, that earnings are not fully supported by underlying cash generation. This shift warrants further investigation to understand the drivers behind the change and assess potential implications for the quality of reported earnings.
The divergence between the increasing net operating assets and the fluctuating accruals, particularly the negative accruals ratio in 2025, suggests a changing relationship between reported earnings and cash flows. The substantial decrease in accruals in the most recent year could indicate improved cash management, a change in accounting practices, or potentially, a decline in earnings quality. Further analysis, including a comparison to industry peers and a review of underlying business operations, is recommended to fully understand these trends.