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% | — | — | — | — | |
| Caterpillar Inc. | 1.82% | — | — | — | — | |
| Eaton Corp. plc | 2.87% | — | — | — | — | |
| GE Aerospace | -7.82% | — | — | — | — | |
| Honeywell International Inc. | -1.99% | — | — | — | — | |
| Lockheed Martin Corp. | 15.67% | — | — | — | — | |
| RTX Corp. | 1.57% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Capital Goods | -0.33% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | 0.67% | 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.
The financial reporting quality, as measured by balance-sheet-based aggregate accruals, exhibited significant volatility between 2019 and 2022. A pronounced reversal in accrual levels occurred in 2020, followed by a period of stabilization and gradual increase in the subsequent two fiscal years.
- Net Operating Assets Trend
- A substantial reduction in net operating assets was observed in 2020, falling from 11.58 billion USD in 2019 to 8.41 billion USD. This was followed by a consistent upward trajectory, with assets recovering to 8.96 billion USD in 2021 and 9.72 billion USD by the end of 2022.
- Aggregate Accruals Volatility
- Aggregate accruals shifted from a positive 1.33 billion USD in 2019 to a significant negative value of 3.17 billion USD in 2020. This indicates a period where cash flows substantially exceeded reported accounting earnings. From 2021 onward, aggregate accruals returned to positive territory, recording 546.7 million USD and 765 million USD in 2021 and 2022, respectively.
- Accruals Ratio Analysis
- The accruals ratio experienced a sharp decline from 12.18% in 2019 to -31.74% in 2020, reflecting the aforementioned divergence between earnings and cash flow. The ratio subsequently normalized, rising to 6.30% in 2021 and 8.19% in 2022. The transition from a deep negative ratio to a low positive ratio suggests a return to a more stable relationship between operating assets and reported income, reducing the volatility associated with reporting quality observed in 2020.
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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% | — | — | — | — | |
| Caterpillar Inc. | 3.26% | — | — | — | — | |
| Eaton Corp. plc | 4.55% | — | — | — | — | |
| GE Aerospace | -15.92% | — | — | — | — | |
| Honeywell International Inc. | -0.79% | — | — | — | — | |
| Lockheed Martin Corp. | -1.36% | — | — | — | — | |
| RTX Corp. | 0.87% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Capital Goods | -5.98% | -27.73% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | -2.30% | -17.51% | — | — | — | |
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.
The financial data indicates a period of significant volatility in asset valuation and accrual levels between 2019 and 2022, characterized by a sharp contraction in 2020 followed by a steady recovery phase.
- Net Operating Assets Trend
- A substantial decline in net operating assets is observed between 2019 and 2020, where values dropped from 11,582,200 thousand US$ to 8,409,300 thousand US$. Following this trough, a consistent upward trajectory emerged, with assets increasing to 8,956,000 thousand US$ in 2021 and reaching 9,721,000 thousand US$ by the end of 2022.
- Aggregate Accruals Movement
- Cash-flow-statement-based aggregate accruals exhibited a wide swing, moving from a high of 1,234,600 thousand US$ in 2019 to a negative 572,800 thousand US$ in 2020. This negative position was reversed in 2021, with accruals returning to positive territory at 374,700 thousand US$ and continuing to grow to 597,600 thousand US$ in 2022.
- Accruals Ratio and Reporting Quality
- The accruals ratio shows a high level of variance, starting at 11.31% in 2019, which suggests a significant gap between reported earnings and cash flows. The shift to a negative ratio of -5.73% in 2020 indicates a period where cash flows exceeded reported accrual-based earnings. From 2021 onward, the ratio returned to a positive trend, rising from 4.32% to 6.40%, suggesting a stabilization of the relationship between cash flow and accounting earnings at a more moderate level than observed in 2019.
Overall, the transition from a high positive accruals ratio in 2019 to a negative ratio in 2020, and subsequently back to a gradual increase, reflects a fluctuating relationship between the company's cash generation and its reported financial performance. The synchronization of the recovery in both net operating assets and the accruals ratio since 2020 suggests a period of balance sheet rebuilding and stabilizing financial reporting quality.
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