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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Sherwin-Williams Co. pages available for free this week:
- Income Statement
- Analysis of Short-term (Operating) Activity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Enterprise Value (EV)
- Enterprise Value to EBITDA (EV/EBITDA)
- Dividend Discount Model (DDM)
- Total Asset Turnover since 2005
- Price to Earnings (P/E) since 2005
- Analysis of Revenues
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
Sherwin-Williams Co., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term borrowings | ||||||
| Less: Current portion of long-term debt | ||||||
| Less: Current portion of finance lease liabilities | ||||||
| Less: Long-term debt, excluding current portion | ||||||
| Less: Long-term finance lease liabilities, excluding current portion | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Linde plc | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Chemicals | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Materials | ||||||
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] =
4 Click competitor name to see calculations.
The balance-sheet-based accruals ratio exhibited considerable fluctuation over the four-year period. Net operating assets demonstrated a generally increasing trend, while aggregate accruals displayed significant volatility, impacting the accruals ratio.
- Net Operating Assets
- Net operating assets decreased from $13,473,000 thousand in 2022 to $13,289,900 thousand in 2023, representing a slight decline. Subsequent years showed growth, reaching $13,918,500 thousand in 2024 and further increasing to $15,457,800 thousand in 2025. This indicates a positive trend in the company’s operational asset base over the latter part of the analyzed period.
- Balance-Sheet-Based Aggregate Accruals
- Balance-sheet-based aggregate accruals were $1,586,500 thousand in 2022. A substantial decrease was observed in 2023, with accruals falling to -$183,100 thousand. Accruals then turned positive in 2024, reaching $628,600 thousand, and continued to rise to $1,539,300 thousand in 2025. This pattern suggests a shift in the timing of cash flows relative to reported earnings.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio was 12.51% in 2022. It experienced a significant decline in 2023, becoming negative at -1.37%. The ratio recovered to 4.62% in 2024 and increased substantially to 10.48% in 2025. The negative value in 2023 suggests that cash flows from operations exceeded reported earnings, while the increasing values in 2024 and 2025 indicate a growing reliance on accruals to support reported earnings. A ratio above zero indicates that earnings are increasingly reliant on accruals rather than cash flow.
The volatility in the accruals ratio warrants further investigation. The substantial decrease in 2023, followed by a return to positive values in subsequent years, could indicate changes in accounting practices, revenue recognition policies, or the management of working capital. The increasing accruals ratio in 2024 and 2025 should be monitored to assess potential implications for the quality of reported earnings.
Cash-Flow-Statement-Based Accruals Ratio
Sherwin-Williams Co., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net income | ||||||
| Less: Net operating cash | ||||||
| Less: Net investing cash | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Linde plc | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Chemicals | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Materials | ||||||
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] =
2 Click competitor name to see calculations.
The net operating assets exhibited an overall increasing trend throughout the observed period. Beginning at US$13,473,000 in 2022, they decreased slightly to US$13,289,900 in 2023 before recovering and increasing to US$13,918,500 in 2024 and further to US$15,457,800 in 2025.
- Cash-flow-statement-based aggregate accruals
- Cash-flow-statement-based aggregate accruals demonstrated significant fluctuation. A value of US$1,707,800 was recorded in 2022, followed by a substantial decrease and a negative value of US$93,800 in 2023. Accruals then turned positive, reaching US$724,500 in 2024 and increasing to US$1,183,200 in 2025.
- Cash-flow-statement-based accruals ratio
- The cash-flow-statement-based accruals ratio mirrored the trend in aggregate accruals. It began at 13.47% in 2022, experienced a sharp decline to -0.70% in 2023, and then increased to 5.33% in 2024. The ratio continued its upward trajectory, reaching 8.06% in 2025. The negative ratio in 2023 indicates that cash flows from operations exceeded reported net income, suggesting potentially conservative accounting practices or efficient cash management during that year. The subsequent increases suggest a growing reliance on accruals relative to cash flows.
The shift from positive to negative accruals in 2023, and the subsequent return to positive accruals, warrants further investigation. While a negative accruals ratio can indicate high-quality earnings, the substantial swing requires scrutiny to determine the underlying drivers. The increasing accruals ratio in 2024 and 2025, while remaining within a reasonable range, should be monitored to assess whether it signals a potential change in earnings quality.