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
United States Steel Corp., 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 | 19,458) | 17,816) | 12,059) | 11,608) | 10,982) | |
| Less: Cash and cash equivalents | 3,504) | 2,522) | 1,985) | 749) | 1,000) | |
| Operating assets | 15,954) | 15,294) | 10,074) | 10,859) | 9,982) | |
| Operating Liabilities | ||||||
| Total liabilities | 9,147) | 8,713) | 8,180) | 7,515) | 6,779) | |
| Less: Short-term debt and current maturities of long-term debt | 63) | 28) | 192) | 14) | 65) | |
| Less: Long-term debt, less unamortized discount and debt issuance costs, excluding current maturities | 3,914) | 3,863) | 4,695) | 3,627) | 2,316) | |
| Operating liabilities | 5,170) | 4,822) | 3,293) | 3,874) | 4,398) | |
| Net operating assets1 | 10,784) | 10,472) | 6,781) | 6,985) | 5,584) | |
| Balance-sheet-based aggregate accruals2 | 312) | 3,691) | (204) | 1,401) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 2.94% | 42.79% | -2.96% | 22.29% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Freeport-McMoRan Inc. | 10.97% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Materials | 1.53% | 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
= 15,954 – 5,170 = 10,784
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 10,784 – 10,472 = 312
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 312 ÷ [(10,784 + 10,472) ÷ 2] = 2.94%
4 Click competitor name to see calculations.
The analysis of financial reporting quality reveals significant volatility in the balance-sheet-based accruals ratio between 2019 and 2022, characterized by sharp fluctuations that suggest periodic divergences between reported earnings and cash flow generation.
- Net Operating Assets Trend
- Net operating assets remained relatively stable from 2019 to 2020, moving from 6,985 million USD to 6,781 million USD. A substantial increase occurred in 2021, where assets rose to 10,472 million USD, followed by a further slight increase to 10,784 million USD by the end of 2022. This growth indicates a significant expansion of the operating base during the 2021 fiscal year.
- Aggregate Accruals Volatility
- Aggregate accruals exhibited extreme variance over the four-year period. After starting at 1,401 million USD in 2019, accruals turned negative in 2020 at -204 million USD. A sharp spike occurred in 2021, reaching a peak of 3,691 million USD, before contracting significantly to 312 million USD in 2022. This pattern indicates inconsistent alignment between accounting profits and cash flows.
- Accruals Ratio Interpretation
- The accruals ratio followed the volatility of the aggregate accruals. In 2019, the ratio stood at 22.29%, dropping to -2.96% in 2020, which typically suggests a period of high earnings quality or conservative reporting. However, the ratio surged to 42.79% in 2021, marking a period of high accruals relative to net operating assets, which may indicate a decrease in earnings quality or a substantial buildup of non-cash current assets. By 2022, the ratio normalized significantly to 2.94%, suggesting a correction of the previous year's accrual spike.
The overall trend demonstrates that while the operating asset base has grown, the reporting quality as measured by the accruals ratio has been unstable, peaking in 2021 before returning to a low positive value in 2022.
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Cash-Flow-Statement-Based Accruals Ratio
United States Steel Corp., 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 earnings (loss) attributable to United States Steel Corporation | 2,524) | 4,174) | (1,165) | (630) | 1,115) | |
| Less: Net cash provided by operating activities | 3,505) | 4,090) | 138) | 682) | 938) | |
| Less: Net cash used in investing activities | (1,679) | (840) | (563) | (1,958) | (963) | |
| Cash-flow-statement-based aggregate accruals | 698) | 924) | (740) | 646) | 1,140) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 6.57% | 10.71% | -10.75% | 10.28% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Freeport-McMoRan Inc. | 6.85% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Materials | 1.97% | -9.09% | — | — | — | |
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 × 698 ÷ [(10,784 + 10,472) ÷ 2] = 6.57%
2 Click competitor name to see calculations.
The financial reporting quality, as measured by cash-flow-statement-based accruals, exhibits significant volatility between 2019 and 2022. While net operating assets showed a marked increase in the latter half of the period, the accruals ratio fluctuated considerably, reflecting shifts in the relationship between accrual-based earnings and operational cash flows.
- Net Operating Assets Trend
- A period of relative stability was observed between 2019 and 2020, with values remaining near 6.8 billion USD. However, a substantial increase occurred in 2021, where net operating assets rose to 10.47 billion USD, followed by a further slight increase to 10.78 billion USD in 2022. This represents a significant expansion of the operational asset base over the four-year period.
- Aggregate Accruals Analysis
- Cash-flow-statement-based aggregate accruals displayed an oscillatory pattern. After starting at 646 million USD in 2019, accruals shifted to a negative 740 million USD in 2020, indicating a period where cash flows from operations exceeded accrual-based earnings. Accruals returned to positive territory in 2021 at 924 million USD before moderating to 698 million USD in 2022.
- Accruals Ratio Interpretation
- The accruals ratio mirrored the volatility of aggregate accruals, moving from 10.28% in 2019 to -10.75% in 2020. The ratio peaked in 2021 at 10.71% before declining to 6.57% in 2022. The shift from a negative ratio in 2020 back to positive ratios in 2021 and 2022 suggests a transition in earnings quality, where accruals once again began to exceed cash flows, although the ratio showed a downward trend toward the end of the analyzed period.
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