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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Etsy Inc. pages available for free this week:
- Cash Flow Statement
- Analysis of Profitability Ratios
- Analysis of Liquidity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Capital Asset Pricing Model (CAPM)
- Present Value of Free Cash Flow to Equity (FCFE)
- Return on Equity (ROE) since 2015
- Total Asset Turnover since 2015
- Price to Earnings (P/E) since 2015
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
Etsy Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Short-term investments | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Finance lease obligations, current | ||||||
| Less: Finance lease obligations, net of current portion | ||||||
| Less: Facility financing obligation | ||||||
| Less: Long-term debt, net | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Amazon.com Inc. | ||||||
| Home Depot Inc. | ||||||
| Lowe’s Cos. Inc. | ||||||
| TJX Cos. Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Consumer Discretionary Distribution & Retail | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Discretionary | ||||||
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= – =
3 2021 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 a substantial increase from 119,067 thousand USD in 2018 to 436,394 thousand USD in 2019. However, in 2020, there was a marked decline to 189,021 thousand USD. Subsequently, the figure surged significantly to 2,032,126 thousand USD by the end of 2021. This indicates considerable fluctuations with a notable upward trend in 2021.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals showed high volatility over the period. In 2018, accruals were negative at -7,239 thousand USD, shifting dramatically to a high positive value of 317,327 thousand USD in 2019. The accruals reverted to a large negative figure of -247,373 thousand USD in 2020 before increasing sharply again to 1,843,105 thousand USD in 2021. This pattern suggests significant variability in the accounting adjustments relative to operating assets.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, expressed as a percentage, reflects considerable instability and extremes. The ratio moved from a negative -5.9% in 2018 to an elevated 114.26% in 2019, indicating accruals exceeding net operating assets. It then declined sharply to -79.11% in 2020, followed by a further increase to 165.96% in 2021. These fluctuations imply substantial changes in the proportion of accruals relative to operating assets, pointing to variable earnings quality and potential volatility in reported financial results.
- Overall Analysis
- The financial quality measures demonstrate marked variability throughout the four-year period. The sharp swings in net operating assets, aggregate accruals, and the accruals ratio highlight a pattern of pronounced financial adjustments. Particularly in 2021, there was a dramatic increase in the scale of net operating assets and accruals, which may indicate changes in business operations, accounting policies, or other factors affecting financial statement quality. The extreme values and volatility observed signal the need for close examination of underlying causes and their implications on earnings quality and financial stability.
Cash-Flow-Statement-Based Accruals Ratio
Etsy Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income | ||||||
| Less: Net cash provided by 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 | ||||||
| Amazon.com Inc. | ||||||
| Home Depot Inc. | ||||||
| Lowe’s Cos. Inc. | ||||||
| TJX Cos. Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Consumer Discretionary Distribution & Retail | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Discretionary | ||||||
Based on: 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), 10-K (reporting date: 2017-12-31).
1 2021 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.
The financial reporting quality measures reveal notable fluctuations over the examined four-year period. There is a significant overall increase in net operating assets, starting at $119,067 thousand in 2018, rising moderately to $436,394 thousand in 2019, dipping to $189,021 thousand in 2020, and then sharply increasing to $2,032,126 thousand by the end of 2021. This indicates substantial growth in the company's invested capital in operating assets, particularly in the last reported year.
Examining the cash-flow-statement-based aggregate accruals, the data shows a positive figure of $163,959 thousand in 2018 that more than doubles to $377,347 thousand in 2019. However, there is a pronounced reversal in 2020 with a large negative accrual of -$318,331 thousand, which then swings back to a significant positive value of $1,399,925 thousand in 2021. This volatility in accruals suggests considerable changes in the timing and matching of revenues and expenses on the cash flow statement during the period, particularly the sharp decline in 2020 followed by a strong recovery in 2021.
The accruals ratio further reflects these trends. It remains above 130% in 2018 and 2019, indicating accruals exceeding net operating assets in percentage terms. In 2020, the ratio abruptly reverses to -101.8%, consistent with the negative aggregate accruals that year. By 2021, the ratio rebounds to 126.05%, close to the levels observed at the beginning of the period. This oscillation highlights instability in accrual components relative to net operating assets, contributing to the potential variability in financial reporting quality.
Overall, the data portrays a period of significant shifts in financial reporting dynamics, marked by a dramatic expansion in net operating assets and considerable fluctuations in the cash flow accruals and their ratios. These patterns may suggest episodic changes in accounting estimates, business operations, or financial management policies affecting the quality and consistency of reported earnings and accruals over the duration considered.