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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- Cash Flow Statement
- Common-Size Income Statement
- Analysis of Liquidity Ratios
- Common Stock Valuation Ratios
- Enterprise Value to FCFF (EV/FCFF)
- Dividend Discount Model (DDM)
- Operating Profit Margin since 2005
- Return on Assets (ROA) since 2005
- Debt to Equity since 2005
- Price to Operating Profit (P/OP) since 2005
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Balance-Sheet-Based Accruals Ratio
Union Pacific Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Debt due within one year | ||||||
| Less: Debt due after one year | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| FedEx Corp. | ||||||
| Uber Technologies Inc. | ||||||
| United Airlines Holdings Inc. | ||||||
| United Parcel Service Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Transportation | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | ||||||
Based on: 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), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= – =
3 2024 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.
- Net Operating Assets
- The net operating assets displayed a consistent upward trend over the four-year period. Starting at $42,930 million in 2021, the figure increased to $44,516 million in 2022, then to $46,312 million in 2023, and reached $47,066 million in 2024. This steady increase suggests a gradual expansion in the company's operating asset base.
- Balance-sheet-based Aggregate Accruals
- The balance-sheet-based aggregate accruals rose notably from $1,042 million in 2021 to $1,586 million in 2022, and then continued to increase, reaching $1,796 million in 2023. However, in 2024, a significant decrease occurred, with accruals dropping sharply to $754 million. This decline could indicate improved cash flow quality or less reliance on accruals in the most recent period.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, which measures the proportion of accruals relative to net operating assets, followed a similar pattern to the aggregate accruals. It increased from 2.46% in 2021 to 3.63% in 2022, further rising to 3.95% in 2023. In 2024, the ratio declined markedly to 1.61%. This decline in the last year indicates a reduction in accruals relative to the asset base, suggesting potential improvements in earnings quality or accounting conservatism.
Cash-Flow-Statement-Based Accruals Ratio
Union Pacific Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net income | ||||||
| Less: Cash provided by operating activities | ||||||
| Less: Cash used in investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| FedEx Corp. | ||||||
| Uber Technologies Inc. | ||||||
| United Airlines Holdings Inc. | ||||||
| United Parcel Service Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Transportation | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | ||||||
Based on: 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), 10-K (reporting date: 2020-12-31).
1 2024 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.
- Net Operating Assets
- The net operating assets demonstrated a consistent upward trend over the four-year period. Starting at US$42,930 million at the end of 2021, it increased to US$44,516 million in 2022, continued to rise to US$46,312 million in 2023, and reached US$47,066 million by the end of 2024. This steady growth indicates ongoing investment or accumulation in operating assets, suggesting an expansion in the company’s operational base.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals showed a significant increase from US$200 million in 2021 to US$1,107 million in 2022, marking more than a fivefold rise. The upward momentum continued into 2023 with accruals reaching US$1,667 million, the highest over the observed period. However, in 2024, there was a notable decline to US$726 million, indicating a reduction in accruals though still substantially higher compared to the initial year. This pattern reflects increased non-cash adjustments or timing differences in earnings relative to cash flows during the first three years, followed by a partial reversal or normalization in the final year.
- Cash-flow-statement-based Accruals Ratio
- Corresponding with the trend in aggregate accruals, the accruals ratio rose sharply from 0.47% in 2021 to 2.53% in 2022 and further to 3.67% in 2023. This rise signifies an increasing proportion of accruals relative to net operating assets, potentially affecting earnings quality. In 2024, the ratio declined to 1.55%, suggesting an improvement in the proportion of cash-based earnings relative to accruals. Nevertheless, the ratio remains elevated compared to the beginning of the period, implying that while there was some improvement, accruals still represent a significant component of the company's earnings quality measure.
- Overall Insights
- The data reveals that while net operating assets steadily increased, indicating growth in operational scale, the accruals component experienced volatility with a peak in 2023 followed by a decline in 2024. The elevated accruals and accruals ratio for the bulk of the period may raise concerns regarding the sustainability and quality of reported earnings, as higher accruals often reflect increased reliance on non-cash earnings components. The partial decrease in 2024 could suggest enhanced earnings quality or changes in accounting practices or business activities reducing accrual impact. Continuous monitoring of these trends is advisable to assess whether earnings quality is stabilizing or if accrual volatility persists.