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
Trane Technologies plc, balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 18,081,600) | 18,059,800) | 18,156,700) | 20,492,300) | 17,914,900) | |
| Less: Cash and cash equivalents | 1,220,500) | 2,159,200) | 3,289,900) | 1,303,600) | 903,400) | |
| Operating assets | 16,861,100) | 15,900,600) | 14,866,800) | 19,188,700) | 17,011,500) | |
| Operating Liabilities | ||||||
| Total liabilities | 11,976,400) | 11,786,700) | 11,729,600) | 13,179,900) | 10,850,100) | |
| Less: Short-term borrowings and current maturities of long-term debt | 1,048,000) | 350,400) | 775,600) | 650,500) | 350,600) | |
| Less: Long-term debt,excluding current maturities | 3,788,300) | 4,491,700) | 4,496,500) | 4,922,900) | 3,740,700) | |
| Operating liabilities | 7,140,100) | 6,944,600) | 6,457,500) | 7,606,500) | 6,758,800) | |
| Net operating assets1 | 9,721,000) | 8,956,000) | 8,409,300) | 11,582,200) | 10,252,700) | |
| Balance-sheet-based aggregate accruals2 | 765,000) | 546,700) | (3,172,900) | 1,329,500) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 8.19% | 6.30% | -31.74% | 12.18% | — | |
| 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: 2022-12-31), 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).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 16,861,100 – 7,140,100 = 9,721,000
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 9,721,000 – 8,956,000 = 765,000
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 765,000 ÷ [(9,721,000 + 8,956,000) ÷ 2] = 8.19%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets demonstrate a declining trend from December 31, 2019, to December 31, 2020, decreasing from approximately US$11.58 billion to about US$8.41 billion. Following this decline, there is a moderate recovery in the subsequent years, rising to roughly US$8.96 billion in 2021 and further increasing to approximately US$9.72 billion by the end of 2022. Overall, despite the initial significant decline, the net operating assets show a rebound, though they remain below the 2019 level.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals display notable volatility across the periods. In 2019, the value stands positive at about US$1.33 billion, then shifts sharply to a negative figure near US$-3.17 billion in 2020, indicating significant changes in accrual accounting measures during that year. After this substantial negative position, accruals return to positive territory in 2021 and 2022, at approximately US$547 million and US$765 million respectively. This recovery suggests a normalization or adjustment following the atypical 2020 period.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio corroborates the pattern seen in aggregate accruals, showing a high positive rate of 12.18% in 2019, followed by a pronounced negative value of -31.74% in 2020. This sharp reversal reflects the significant accrual-related adjustment during that year. The ratio then reverts to positive figures in 2021 and 2022, with values of 6.3% and 8.19% respectively. The ratios in the latter years suggest a stabilizing accrual position, though still more conservative compared to the initial 2019 ratio.
Cash-Flow-Statement-Based Accruals Ratio
Trane Technologies plc, cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net earnings attributable to Trane Technologies plc | 1,756,500) | 1,423,400) | 854,900) | 1,410,900) | 1,337,600) | |
| Less: Net cash provided by operating activities | 1,698,700) | 1,594,400) | 1,766,200) | 1,956,300) | 1,474,500) | |
| Less: Net cash used in investing activities | (539,800) | (545,700) | (338,500) | (1,780,000) | (629,400) | |
| Cash-flow-statement-based aggregate accruals | 597,600) | 374,700) | (572,800) | 1,234,600) | 492,500) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 6.40% | 4.32% | -5.73% | 11.31% | — | |
| 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: 2022-12-31), 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).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 597,600 ÷ [(9,721,000 + 8,956,000) ÷ 2] = 6.40%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets show a significant decline from 11,582,200 thousand US dollars at the end of 2019 to 8,409,300 thousand US dollars in 2020. This was followed by a modest recovery, increasing to 8,956,000 thousand in 2021 and further to 9,721,000 thousand in 2022. Despite this upward trend in the last two years, the net operating assets in 2022 remained below the 2019 level, indicating a partial recovery but an overall contraction relative to the initial period.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals exhibit considerable volatility over the periods. Starting at 1,234,600 thousand US dollars in 2019, there is a sharp reversal to a negative value of -572,800 thousand in 2020. This negative accrual suggests changes in accounting estimates or working capital movements impacting earnings differently from cash flows during that year. Subsequently, the accruals returned to positive values in 2021 and 2022, with amounts of 374,700 thousand and 597,600 thousand respectively, reflecting a restoration of accrual-based earnings components that align more closely with operating cash flows.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio follows a similar pattern to the aggregate accruals, beginning with a relatively high positive value of 11.31% in 2019. It then sharply declines to -5.73% in 2020, indicating a substantial shift in the relationship between accruals and net operating assets. In 2021 and 2022, the ratio moves back into positive territory at 4.32% and 6.40% respectively, suggesting a partial normalization of accruals relative to net operating assets. The variability in this ratio reflects fluctuations in earnings quality, with 2020 representing a year of lower quality earnings as indicated by the negative ratio.
- Overall Analysis
- The data presents a picture of fluctuating financial reporting quality over the four-year period. The sharp decrease in net operating assets and negative accruals in 2020 may reflect operational or economic challenges affecting asset utilization and earnings quality. The subsequent recovery in both net operating assets and accruals indicates improvements in financial performance and reporting quality. However, the accruals ratio did not return to the 2019 level by 2022, implying that while improvements have occurred, full restoration of prior earnings quality has not been achieved. This trend highlights the importance of closely monitoring accruals in relation to operating assets to assess the persistence and reliability of earnings.