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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American Airlines Group Inc. pages available for free this week:
- Income Statement
- Cash Flow Statement
- Common-Size Income Statement
- Analysis of Solvency Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Common Stock Valuation Ratios
- Enterprise Value to EBITDA (EV/EBITDA)
- Price to FCFE (P/FCFE)
- Return on Assets (ROA) since 2013
- Price to Operating Profit (P/OP) since 2013
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Balance-Sheet-Based Accruals Ratio
American Airlines Group Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash | ||||||
| Less: Short-term investments | ||||||
| Less: Restricted cash and short-term investments | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current maturities of long-term debt and finance leases | ||||||
| Less: Long-term debt and finance leases, net of 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 | ||||||
| FedEx Corp. | ||||||
| Uber Technologies Inc. | ||||||
| Union Pacific Corp. | ||||||
| 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: 2023-12-31), 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).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= – =
3 2023 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 exhibited relative stability over the period from 2020 to 2023, fluctuating between approximately $17.3 billion and $19.9 billion. There was a slight decline from $18.3 billion in 2020 to $17.3 billion in 2021, followed by an increase to $19.9 billion in 2022. In 2023, the figure decreased marginally to $19.2 billion, indicating moderate variability without a clear long-term upward or downward trend.
- Balance-sheet-based aggregate accruals
- This measure showed significant volatility throughout the analyzed timeframe. In 2020 and 2021, aggregate accruals were negative, standing at -$1.96 billion and -$0.95 billion respectively, which may indicate conservative recognition of earnings or delayed expense acknowledgment. A marked shift occurred in 2022, with a positive aggregate accrual of $2.61 billion, suggesting a reversal in prior trends or potentially more aggressive accounting estimates. In 2023, aggregate accruals returned to a negative value of -$0.69 billion, signaling another change in the direction of accrual adjustments.
- Balance-sheet-based accruals ratio
- The accruals ratio mirrored the fluctuations observed in aggregate accruals, reflecting notable variability in the quality of earnings or the accounting practices employed. The ratio was negative in 2020 and 2021 at -10.19% and -5.37% respectively, then shifted to a positive 14% in 2022, indicating a significant increase in accrual activity relative to net operating assets. The ratio declined again to -3.54% in 2023. These oscillations suggest inconsistent accrual behavior over the period, which could imply changes in earnings management strategies or financial reporting policies.
Cash-Flow-Statement-Based Accruals Ratio
American Airlines Group Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Net income (loss) | ||||||
| Less: Net cash provided by (used in) operating activities | ||||||
| Less: Net cash (used in) provided by 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. | ||||||
| Union Pacific Corp. | ||||||
| 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: 2023-12-31), 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).
1 2023 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 fluctuating yet generally increasing trend over the analyzed period. Starting at 18,253 million US dollars at the end of 2020, this figure decreased slightly to 17,299 million in 2021. However, it subsequently increased, reaching 19,904 million in 2022 before experiencing a minor decline to 19,212 million in 2023. This pattern indicates some volatility but overall a moderate expansion in the scale of net operating assets.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals based on the cash flow statement exhibited significant variability and a notable shift from positive to negative territory. In 2020, the accruals were positive at 2,000 million US dollars, increasing to 3,286 million in 2021, reflecting growing accruals that might suggest either conservative cash management or timing differences in revenue and expenses. However, a sharp reversal occurred in 2022, with accruals turning negative to -2,682 million, continuing at -2,479 million in 2023. This shift implies increased adjustments to operating cash flows, potentially linked to changes in working capital management or non-cash items impacting reported earnings.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrors the behavior of aggregate accruals and highlights the relative weight of accruals to operating activities. It increased from 10.4% in 2020 to a peak of 18.49% in 2021, denoting a larger proportion of accruals relative to cash flows. This was followed by a pronounced decrease into negative values, -14.42% in 2022 and -12.68% in 2023, consistent with the shift to negative aggregate accruals. Negative ratios indicate that accruals were reducing operating cash flows, which may reflect changes in accounting policies, revenue recognition timing, or operational challenges.
- Summary
- Overall, the data reveal that while net operating assets grew moderately over the four-year period, the quality of earnings as indicated by cash-flow-based accruals and their ratio has deteriorated notably since 2021. The transition from positive to negative accruals and corresponding ratio suggests increased earnings management risk or operational complexities affecting cash flow realization. These patterns warrant further investigation into the underlying causes of the accrual fluctuations and their potential impact on future financial performance and reporting reliability.