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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United Rentals Inc. pages available for free this week:
- Balance Sheet: Assets
- Common-Size Balance Sheet: Assets
- Analysis of Profitability Ratios
- Analysis of Liquidity Ratios
- Common Stock Valuation Ratios
- Enterprise Value to FCFF (EV/FCFF)
- Selected Financial Data since 2005
- Return on Equity (ROE) since 2005
- Return on Assets (ROA) since 2005
- Price to Book Value (P/BV) since 2005
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Balance-Sheet-Based Accruals Ratio
United Rentals Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term debt and current maturities of long-term debt | ||||||
| Less: Long-term debt, excluding current maturities | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Boeing Co. | ||||||
| Caterpillar Inc. | ||||||
| Eaton Corp. plc | ||||||
| GE Aerospace | ||||||
| Honeywell International Inc. | ||||||
| Lockheed Martin Corp. | ||||||
| RTX Corp. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Capital Goods | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | ||||||
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
= – =
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= – =
3 2022 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 analysis of the financial quality measures reveals notable fluctuations and trends over the four-year period.
- Net Operating Assets
- The net operating assets show an overall increasing trend, starting from $15,206 million in 2019, dipping slightly to $14,025 million in 2020, then rising again to $15,532 million in 2021, and reaching a peak of $18,326 million in 2022. This suggests a general expansion in the company's operational asset base, indicating growth or increased investment in operating assets over time.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals fluctuate significantly, with a positive balance of $99 million in 2019, a sharp negative swing to -$1,181 million in 2020, followed by strong recoveries to $1,507 million in 2021 and $2,794 million in 2022. These large variations indicate volatility in the non-cash components of earnings, which may affect earnings quality and suggest changes in accounting estimates or operational adjustments across the periods.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, representing aggregate accruals as a percentage of net operating assets, mirrors the volatility observed in the aggregate accruals. It begins at a modest 0.65% in 2019, plunges to -8.08% in 2020, then swings markedly upward to 10.2% in 2021 and further to 16.5% in 2022. The sharp increase in the accruals ratio in the last two years suggests increased reliance on accruals relative to operating assets, which may point to greater earnings management or shifts in operational accounting practices.
Overall, the data indicates that while net operating assets have grown steadily, the accrual components of earnings have experienced considerable volatility and a rising trend in relative magnitude. This pattern warrants attention as it may impact the assessment of earnings quality and financial reliability over the observed periods.
Cash-Flow-Statement-Based Accruals Ratio
United Rentals Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net 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 | ||||||
| Boeing Co. | ||||||
| Caterpillar Inc. | ||||||
| Eaton Corp. plc | ||||||
| GE Aerospace | ||||||
| Honeywell International Inc. | ||||||
| Lockheed Martin Corp. | ||||||
| RTX Corp. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Capital Goods | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | ||||||
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 × ÷ [( + ) ÷ 2] =
2 Click competitor name to see calculations.
- Net operating assets
- The net operating assets exhibited a fluctuating trend over the four-year period. Initially, the figure decreased from 15,206 million USD in 2019 to 14,025 million USD in 2020, indicating a reduction in operating assets. Subsequently, there was an increase in 2021 to 15,532 million USD, followed by a further significant rise to 18,326 million USD in 2022. Overall, the net operating assets increased substantially by 2022 compared to 2019, pointing towards growth in operating resources or investments.
- Cash-flow-statement-based aggregate accruals
- The aggregate accruals demonstrated considerable volatility during the period. In 2019, the accruals were negative at -140 million USD, which worsened sharply to -1,545 million USD in 2020, indicating increased accruals outflows that year. However, a marked reversal occurred in 2021 with a positive accrual of 1,308 million USD, continuing to grow to 2,688 million USD in 2022. This shift from highly negative to positive and increasing accruals suggests significant changes in working capital management or revenue recognition practices over these years.
- Cash-flow-statement-based accruals ratio
- The accruals ratio, expressed as a percentage, follows a pattern consistent with the aggregate accruals. It started at a small negative value of -0.92% in 2019, deepened to -10.57% in 2020, indicating high negative accruals relative to cash flow. In 2021, the ratio turned positive at 8.85%, further increasing to 15.88% in 2022. The substantial rise in the accruals ratio over the last two years points to increased accrual-based earnings relative to cash flow, which may reflect changes in accounting estimates or management judgment affecting earnings quality.