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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Linde plc pages available for free this week:
- Statement of Comprehensive Income
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Long-term (Investment) Activity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Common Stock Valuation Ratios
- Capital Asset Pricing Model (CAPM)
- Dividend Discount Model (DDM)
- Selected Financial Data since 2005
- Total Asset Turnover since 2005
- Price to Earnings (P/E) since 2005
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Balance-Sheet-Based Accruals Ratio
Linde plc, balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term debt | ||||||
| Less: Current portion of long-term debt | ||||||
| Less: Current finance lease liabilities | ||||||
| Less: Long-term debt, excluding current portion | ||||||
| Less: Long-term finance lease liabilities | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Sherwin-Williams Co. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Chemicals | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Materials | ||||||
Based on: 10-K (reporting date: 2024-12-31), 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).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= – =
3 2024 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.
The data over the four-year period reveals notable fluctuations in key financial metrics related to operating assets and accruals.
- Net Operating Assets
- The net operating assets exhibited a decreasing trend from 57,001 million US dollars in 2021 to 54,021 million in 2022, representing a decline. However, this was followed by a gradual increase in the subsequent years, reaching 55,997 million in 2023 and slightly rising to 56,465 million in 2024. Overall, the metric shows an initial contraction followed by mild recovery, yet the end value in 2024 remains below the 2021 level, indicating a net reduction over the full period.
- Balance-sheet-based Aggregate Accruals
- This item showed significant volatility and a marked change in direction over the period. In 2021 and 2022, accruals were negative at -5,144 million and -2,980 million respectively, indicating that accrual accounting adjustments were reducing operating assets or earnings. Notably, the 2021 value was substantially more negative than 2022, which marked an improvement. In 2023, accruals turned positive at 1,976 million, suggesting a reversal in accounting adjustments contributing positively rather than negatively. This positive trend moderated in 2024 with a reduced positive accrual figure of 468 million, indicating some stabilization but at a lower magnitude.
- Balance-sheet-based Accruals Ratio
- The accruals ratio shifted from negative values of -8.63% in 2021 and -5.37% in 2022 to positive percentages of 3.59% in 2023 and 0.83% in 2024. This transition from negative to positive accrual ratios reflects a change in the composition or recognition of accruals relative to net operating assets. The largest magnitude of negative accruals ratio occurred in 2021, followed by a less negative figure in 2022, signaling improvement in accrual quality or accounting treatment. The subsequent positive ratios in 2023 and 2024 suggest that accruals began to augment reported operating assets, though the ratio's decline in 2024 indicates a weakening of this effect.
In summary, the data shows an initial decline and partial recovery in net operating assets alongside significant fluctuations in accruals, moving from substantial negative adjustments to moderate positive ones. The accruals ratio's reversal from negative to positive highlights a notable change in the accounting dynamics of the company during the period, with a tendency toward more conservative or adjusted accrual estimates in the latter years. The stabilization in 2024 points to a potential moderation in accrual behavior following the volatility observed earlier.
Cash-Flow-Statement-Based Accruals Ratio
Linde plc, cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net income, Linde plc | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash used for investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Sherwin-Williams Co. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Chemicals | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Materials | ||||||
Based on: 10-K (reporting date: 2024-12-31), 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).
1 2024 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 exhibit a downward trend from 57,001 million US dollars at the end of 2021 to 54,021 million US dollars in 2022. This is followed by a partial recovery in the subsequent years, reaching 55,997 million US dollars in 2023 and slightly increasing to 56,465 million US dollars in 2024. Overall, the net operating assets remain lower in 2024 compared to 2021, indicating a net reduction of about 1,536 million US dollars over the four-year period.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals show a significant shift over the observed time frame. Initially, the figure stands at a negative 2,892 million US dollars in 2021, which suggests a strong disbursement or adjustment in cash flows. This negative value decreases in magnitude in 2022 to negative 1,629 million US dollars, indicating a diminishing accrual effect. Notably, the trend reverses in 2023 and 2024, with positive accrual amounts of 1,564 million and 1,786 million US dollars, respectively. This transition from negative to positive accruals may reflect changes in operational cash flow management or accounting practices.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio moves congruently with the aggregate accruals. It starts at -4.85% in 2021, improving to -2.93% in 2022, demonstrating a reduction in the proportion of accruals relative to operational cash flow components. The ratio then shifts to positive territory with 2.84% in 2023 and slightly increases to 3.18% in 2024. This positive change suggests an increasing reliance or presence of accrual components in the cash-flow statement relative to net operating assets during the later years examined.