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
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 | 3,831,809) | 2,404,489) | 1,542,352) | 901,851) | 605,583) | |
| Less: Cash and cash equivalents | 780,196) | 1,244,099) | 443,293) | 366,985) | 315,442) | |
| Less: Short-term investments | 204,416) | 425,119) | 373,959) | 257,302) | 25,108) | |
| Operating assets | 2,847,197) | 735,271) | 725,100) | 277,564) | 265,033) | |
| Operating Liabilities | ||||||
| Total liabilities | 3,203,190) | 1,662,065) | 1,135,718) | 500,953) | 208,689) | |
| Less: Finance lease obligations, current | 2,418) | 8,537) | 8,275) | 3,884) | 5,798) | |
| Less: Finance lease obligations, net of current portion | 110,283) | 44,979) | 53,611) | 2,095) | 4,115) | |
| Less: Facility financing obligation | —) | —) | —) | 59,991) | 60,049) | |
| Less: Long-term debt, net | 2,275,418) | 1,062,299) | 785,126) | 276,486) | —) | |
| Operating liabilities | 815,071) | 546,250) | 288,706) | 158,497) | 138,727) | |
| Net operating assets1 | 2,032,126) | 189,021) | 436,394) | 119,067) | 126,306) | |
| Balance-sheet-based aggregate accruals2 | 1,843,105) | (247,373) | 317,327) | (7,239) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 165.96% | -79.11% | 114.26% | -5.90% | — | |
| 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 | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Discretionary | 200.00% | — | — | — | — | |
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
= 2,847,197 – 815,071 = 2,032,126
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 2,032,126 – 189,021 = 1,843,105
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,843,105 ÷ [(2,032,126 + 189,021) ÷ 2] = 165.96%
4 Click competitor name to see calculations.
The financial reporting quality, as measured by balance-sheet-based accruals, exhibits extreme volatility between 2018 and 2021. The period is characterized by significant fluctuations in both the absolute magnitude of accruals and the corresponding ratio relative to net operating assets, indicating a highly unstable relationship between reported earnings and cash flows.
- Net Operating Assets Trend
- Net operating assets demonstrate a non-linear growth pattern. After a substantial increase from 119,067 thousand USD in 2018 to 436,394 thousand USD in 2019, assets contracted to 189,021 thousand USD in 2020 before experiencing a massive expansion to 2,032,126 thousand USD by the end of 2021.
- Aggregate Accruals Analysis
- Balance-sheet-based aggregate accruals shifted aggressively between negative and positive territories. Negative accruals were recorded in 2018 (-7,239 thousand USD) and 2020 (-247,373 thousand USD), whereas positive accruals peaked in 2019 (317,327 thousand USD) and surged to 1,843,105 thousand USD in 2021.
- Accruals Ratio Interpretation
- The accruals ratio reflects severe instability, oscillating from -5.90% in 2018 to 114.26% in 2019. A sharp reversal occurred in 2020, with the ratio falling to -79.11%, followed by an extreme surge to 165.96% in 2021. The high positive ratios observed in 2019 and 2021 suggest that a significant portion of the reported net operating assets is comprised of accruals, which typically indicates a lower quality of earnings as the reported gains are not supported by equivalent cash flows. Conversely, the negative ratios in 2018 and 2020 suggest that cash flow exceeded accrual-based earnings during those periods.
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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 | 493,507) | 349,246) | 95,894) | 77,491) | 81,800) | |
| Less: Net cash provided by operating activities | 651,551) | 678,956) | 206,920) | 198,925) | 67,420) | |
| Less: Net cash (used in) provided by investing activities | (1,557,969) | (11,379) | (488,373) | (285,393) | 61,836) | |
| Cash-flow-statement-based aggregate accruals | 1,399,925) | (318,331) | 377,347) | 163,959) | (47,456) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 126.05% | -101.80% | 135.87% | 133.64% | — | |
| 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 | 50.12% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Discretionary | 21.63% | — | — | — | — | |
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 × 1,399,925 ÷ [(2,032,126 + 189,021) ÷ 2] = 126.05%
2 Click competitor name to see calculations.
Analysis of the cash-flow-statement-based accruals reveals significant volatility in financial reporting quality indicators between 2018 and 2021. The relationship between net operating assets and aggregate accruals shows a non-linear progression, characterized by a dramatic expansion in the final year of the period.
- Net Operating Assets Trend
- Net operating assets experienced substantial growth, increasing from 119,067 thousand US$ in 2018 to 2,032,126 thousand US$ by 2021. Although a contraction was observed in 2020, where assets fell to 189,021 thousand US$, the subsequent surge in 2021 represents a massive expansion of the operating balance sheet.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals exhibited extreme variance over the four-year period. After rising from 163,959 thousand US$ in 2018 to 377,347 thousand US$ in 2019, the figure inverted to negative 318,331 thousand US$ in 2020. This was followed by a sharp increase to 1,399,925 thousand US$ in 2021, indicating a significant divergence between accrual-based accounting and cash flow movements.
- Accruals Ratio Interpretation
- The accruals ratio remained consistently high and positive in 2018 (133.64%) and 2019 (135.87%), suggesting that earnings were heavily driven by accruals. A sharp reversal occurred in 2020, with the ratio dropping to -101.80%, which indicates a period where cash flows exceeded accrual earnings relative to the asset base. By 2021, the ratio returned to a high positive level of 126.05%, signifying that a substantial portion of the reported financial performance is once again reflected in accruals rather than immediate cash inflows.
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