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
First Solar Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 10,365,132) | 8,251,228) | 7,413,746) | 7,108,931) | 7,515,689) | |
| Less: Cash and cash equivalents | 1,946,994) | 1,481,269) | 1,450,654) | 1,227,002) | 1,352,741) | |
| Less: Marketable securities | 155,495) | 1,096,712) | 375,389) | 520,066) | 811,506) | |
| Operating assets | 8,262,643) | 5,673,247) | 5,587,703) | 5,361,863) | 5,351,442) | |
| Operating Liabilities | ||||||
| Total liabilities | 3,677,663) | 2,415,173) | 1,454,195) | 1,588,003) | 2,418,922) | |
| Less: Current portion of debt | 96,238) | —) | 3,896) | 41,540) | 17,510) | |
| Less: Finance lease liabilities, current | 51) | —) | —) | —) | —) | |
| Less: Long-term debt, noncurrent portion | 464,068) | 184,349) | 236,005) | 237,691) | 454,187) | |
| Less: Finance lease liabilities, noncurrent | 17,063) | —) | —) | —) | —) | |
| Operating liabilities | 3,100,243) | 2,230,824) | 1,214,294) | 1,308,772) | 1,947,225) | |
| Net operating assets1 | 5,162,400) | 3,442,423) | 4,373,409) | 4,053,091) | 3,404,217) | |
| Balance-sheet-based aggregate accruals2 | 1,719,977) | (930,986) | 320,318) | 648,874) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 39.98% | -23.82% | 7.60% | 17.40% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Advanced Micro Devices Inc. | 2.36% | 169.75% | 8.05% | — | — | |
| Analog Devices Inc. | 0.03% | -2.94% | 90.70% | -2.85% | — | |
| Applied Materials Inc. | 0.48% | 20.73% | 17.33% | 3.75% | — | |
| Broadcom Inc. | -1.58% | -5.37% | -8.72% | 8.42% | — | |
| Intel Corp. | 13.69% | 10.73% | 11.61% | — | — | |
| KLA Corp. | 3.95% | 21.25% | 3.62% | -4.49% | — | |
| Lam Research Corp. | 1.57% | 16.02% | 8.38% | 9.01% | — | |
| Micron Technology Inc. | 0.78% | 12.07% | 11.51% | 7.56% | — | |
| NVIDIA Corp. | 18.88% | 28.31% | 115.40% | — | — | |
| Qualcomm Inc. | -5.53% | 68.49% | 22.56% | 20.94% | — | |
| Texas Instruments Inc. | 31.37% | 22.75% | 18.48% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | 6.33% | 24.66% | 19.53% | 200.00% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 8.98% | 18.09% | 19.16% | 200.00% | — | |
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
= 8,262,643 – 3,100,243 = 5,162,400
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 5,162,400 – 3,442,423 = 1,719,977
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,719,977 ÷ [(5,162,400 + 3,442,423) ÷ 2] = 39.98%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets have experienced fluctuations over the four-year period. Starting at approximately 4.05 billion US dollars in 2020, there was an increase to around 4.37 billion in 2021. This was followed by a noticeable decline to about 3.44 billion in 2022. However, in 2023, the net operating assets surged significantly to approximately 5.16 billion US dollars, indicating a substantial expansion in net operating assets in the most recent year.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals show considerable variability throughout the period. In 2020, the accruals were positive at roughly 649 million US dollars, but they decreased sharply to about 320 million in 2021. In 2022, the accruals shifted to a substantial negative value of approximately -931 million US dollars, reflecting a reversal or adjustment in accrued balances. By 2023, the accruals rebounded strongly to a positive 1.72 billion US dollars, the highest value observed over the span.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, followed a similar pattern of volatility. It started at 17.4% in 2020 and decreased markedly to 7.6% in 2021. In 2022, the ratio turned negative to -23.82%, corresponding with the significant negative aggregate accruals in that year. In 2023, the ratio increased dramatically to 39.98%, reflecting the large positive aggregate accruals in relation to the net operating assets. This sharp rise suggests a material change in the proportion of accruals to operating assets in 2023.
- Overall Observations
- The data reveals substantial fluctuations in both the magnitude and sign of balance-sheet-based aggregate accruals and their ratio to net operating assets. The negative accruals in 2022 stand out as an anomaly within an otherwise positive or increasing trend. The steep increase in accruals and accruals ratio in 2023, alongside the significant growth in net operating assets, may warrant further investigation to understand the drivers behind these considerable changes. Such variability could impact the quality and predictability of earnings reported by the company.
Cash-Flow-Statement-Based Accruals Ratio
First Solar Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Net income (loss) | 830,777) | (44,166) | 468,693) | 398,355) | (114,933) | |
| Less: Net cash provided by operating activities | 602,260) | 873,369) | 237,559) | 37,120) | 174,201) | |
| Less: Net cash used in investing activities | (472,791) | (1,192,574) | (99,040) | (131,227) | (362,298) | |
| Cash-flow-statement-based aggregate accruals | 701,308) | 275,039) | 330,174) | 492,462) | 73,164) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 16.30% | 7.04% | 7.84% | 13.21% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Advanced Micro Devices Inc. | 1.17% | -15.28% | 8.10% | — | — | |
| Analog Devices Inc. | -0.57% | -2.54% | -11.85% | -3.72% | — | |
| Applied Materials Inc. | -2.05% | 18.18% | 14.75% | -0.54% | — | |
| Broadcom Inc. | -6.71% | -8.94% | -12.34% | 3.65% | — | |
| Intel Corp. | 11.35% | 2.75% | 15.15% | — | — | |
| KLA Corp. | 3.66% | 18.30% | 9.27% | -7.11% | — | |
| Lam Research Corp. | -1.71% | 12.43% | 3.89% | 6.35% | — | |
| Micron Technology Inc. | -2.52% | 11.37% | 10.01% | 5.45% | — | |
| NVIDIA Corp. | -47.90% | 73.13% | 233.25% | — | — | |
| Qualcomm Inc. | -14.57% | 46.91% | 15.61% | 48.48% | — | |
| Texas Instruments Inc. | 26.35% | 28.24% | 29.95% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | 0.45% | 7.45% | 12.36% | 7.12% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 1.46% | 2.91% | 8.62% | -15.54% | — | |
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 × 701,308 ÷ [(5,162,400 + 3,442,423) ÷ 2] = 16.30%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited fluctuations over the four-year period. Starting at approximately 4.05 billion US dollars at the end of 2020, the value increased to about 4.37 billion by the end of 2021. However, there was a notable decline in 2022, with the figure dropping to approximately 3.44 billion. Subsequently, this metric surged in 2023, reaching its highest level in the period analyzed at around 5.16 billion US dollars.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals based on the cash flow statement showed a decreasing trend initially, falling from roughly 492 million US dollars in 2020 to 330 million in 2021, and further down to 275 million in 2022. This downward trend reversed sharply in 2023, with accruals rising significantly to approximately 701 million US dollars, more than doubling the previous year's figure.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, representing aggregate accruals as a percentage of net operating assets, mirrored the movements seen in the accrual figures. It decreased consistently from 13.21% in 2020 to 7.84% in 2021, and further to 7.04% in 2022, indicating a reduction in accruals relative to net operating assets. In 2023, the ratio increased significantly to 16.3%, the highest point in the four-year span, suggesting an elevated level of accruals when compared to the asset base.
- Overall Insights
- The analyzed data depicts a period of volatility in both net operating assets and accrual-related measures. There was a downward trend in net operating assets and accruals through 2022, followed by a pronounced recovery in 2023. The marked increase in the accruals ratio in the latest year may warrant further investigation, as higher accruals in relation to operating assets could imply changes in earnings quality or operational efficiency. The fluctuations observed underline the importance of continuous monitoring to assess the implications for financial reporting quality.