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
Axon Enterprise Inc., 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 | 2,851,894) | 1,688,210) | 1,381,023) | 845,639) | 719,540) | |
| Less: Cash and cash equivalents | 353,684) | 356,332) | 155,440) | 172,250) | 349,462) | |
| Less: Marketable securities | 39,240) | 72,180) | —) | —) | —) | |
| Less: Short-term investments | 581,769) | 14,510) | 406,525) | 178,534) | —) | |
| Operating assets | 1,877,201) | 1,245,188) | 819,058) | 494,855) | 370,078) | |
| Operating Liabilities | ||||||
| Total liabilities | 1,583,403) | 640,361) | 404,768) | 302,144) | 252,216) | |
| Less: Convertible notes, net | 673,967) | —) | —) | —) | —) | |
| Operating liabilities | 909,436) | 640,361) | 404,768) | 302,144) | 252,216) | |
| Net operating assets1 | 967,765) | 604,827) | 414,290) | 192,711) | 117,862) | |
| Balance-sheet-based aggregate accruals2 | 362,938) | 190,537) | 221,579) | 74,849) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 46.16% | 37.39% | 73.01% | 48.20% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Boeing Co. | -12.09% | 30.23% | — | — | — | |
| Caterpillar Inc. | 1.82% | 4.22% | — | — | — | |
| Eaton Corp. plc | 2.87% | 10.92% | — | — | — | |
| GE Aerospace | -7.82% | -33.29% | — | — | — | |
| Honeywell International Inc. | -1.99% | 9.04% | — | — | — | |
| Lockheed Martin Corp. | 15.67% | 23.38% | — | — | — | |
| RTX Corp. | 1.57% | 1.48% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Capital Goods | -0.33% | -0.06% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | 0.29% | 3.43% | 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
= 1,877,201 – 909,436 = 967,765
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 967,765 – 604,827 = 362,938
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 362,938 ÷ [(967,765 + 604,827) ÷ 2] = 46.16%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibit a consistent and significant upward trend over the four-year period. Beginning at approximately 192.7 million US dollars in 2019, the figure more than doubled to around 414.3 million in 2020. The growth continued in subsequent years, reaching approximately 604.8 million in 2021 and culminating at about 967.8 million by the end of 2022. This steady increase indicates an expansion in the company's operating asset base, which may reflect growth initiatives, increased investments, or operational scaling.
- Balance-Sheet-Based Aggregate Accruals
- The balance-sheet-based aggregate accruals show notable fluctuations. There was a marked increase from approximately 74.8 million in 2019 to 221.6 million in 2020, representing nearly a threefold rise. The accruals then declined to around 190.5 million in 2021 but surged again to 362.9 million in 2022. These variations suggest periods of changing accrual levels, which could be influenced by shifts in accounting estimates, timing differences in revenue and expense recognition, or other operational factors affecting accrual accounting.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, displays volatile behavior within the observed timeframe. Starting at 48.2% in 2019, it peaked at 73.01% in 2020, indicating a substantial proportion of accruals relative to operating assets that year. The ratio then declined sharply to 37.39% in 2021 before increasing again to 46.16% in 2022. This volatility may reflect varying degrees of financial reporting quality or changes in the accrual component of earnings relative to asset base, which could be pertinent for stakeholders assessing earnings management or the sustainability of reported earnings.
Cash-Flow-Statement-Based Accruals Ratio
Axon Enterprise Inc., 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 income (loss) | 147,139) | (60,018) | (1,724) | 882) | 29,205) | |
| Less: Net cash provided by operating activities | 235,361) | 124,494) | 38,481) | 65,673) | 63,875) | |
| Less: Net cash (used in) provided by investing activities | (830,967) | 252,556) | (356,526) | (240,737) | (9,860) | |
| Cash-flow-statement-based aggregate accruals | 742,745) | (437,068) | 316,321) | 175,946) | (24,810) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 94.46% | -85.77% | 104.22% | 113.30% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Boeing Co. | -50.32% | -43.09% | — | — | — | |
| Caterpillar Inc. | 3.26% | 5.38% | — | — | — | |
| Eaton Corp. plc | 4.55% | 7.52% | — | — | — | |
| GE Aerospace | -15.92% | -53.22% | — | — | — | |
| Honeywell International Inc. | -0.79% | 2.16% | — | — | — | |
| Lockheed Martin Corp. | -1.36% | -10.24% | — | — | — | |
| RTX Corp. | 0.87% | -1.96% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Capital Goods | -5.98% | -13.86% | -3.12% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | -2.31% | -8.91% | -5.18% | — | — | |
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 × 742,745 ÷ [(967,765 + 604,827) ÷ 2] = 94.46%
2 Click competitor name to see calculations.
- Net operating assets
- The net operating assets have demonstrated a consistent upward trend over the four-year period. Starting at 192,711 thousand US dollars in 2019, the figure more than doubled by the end of 2020, reaching 414,290 thousand US dollars. The growth continued in 2021 and 2022, with values rising to 604,827 and then sharply increasing to 967,765 thousand US dollars, respectively. This suggests a significant expansion in the company's operational asset base.
- Cash-flow-statement-based aggregate accruals
- The aggregate accruals showed considerable volatility across the reported years. Beginning at 175,946 thousand US dollars in 2019, the accruals increased substantially in 2020 to 316,321 thousand US dollars. However, 2021 experienced a notable reversal, with aggregate accruals turning negative to -437,068 thousand US dollars, indicating a substantial adjustment or change in operational cash flow components. In 2022, the accruals reverted to a positive figure of 742,745 thousand US dollars, the highest level in the observed timeframe, which may reflect significant non-cash adjustments impacting earnings quality.
- Cash-flow-statement-based accruals ratio
- The accruals ratio experienced sharp fluctuations, mirroring the trend in aggregate accruals but expressed as a percentage relative to net operating assets. The ratio began at 113.3% in 2019, slightly decreased to 104.22% in 2020, then plummeted to -85.77% in 2021, indicating a negative correlation between accruals and net operating assets in that year. In 2022, the ratio rose back to a positive 94.46%, signaling a substantial recovery though not reaching the high levels observed in 2019 and 2020. These fluctuations point to variability in the quality and timing of earnings relative to cash flows.