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
Monolithic Power Systems Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 3,617,097) | 2,434,353) | 2,058,885) | 1,585,825) | 1,208,491) | |
| Less: Cash and cash equivalents | 691,816) | 527,843) | 288,607) | 189,265) | 334,944) | |
| Less: Short-term investments | 171,130) | 580,633) | 449,266) | 535,817) | 260,169) | |
| Less: Restricted cash | —) | 33,204) | —) | —) | —) | |
| Operating assets | 2,754,151) | 1,292,673) | 1,321,012) | 860,743) | 613,378) | |
| Operating Liabilities | ||||||
| Total liabilities | 471,330) | 384,414) | 390,283) | 341,840) | 241,904) | |
| Operating liabilities | 471,330) | 384,414) | 390,283) | 341,840) | 241,904) | |
| Net operating assets1 | 2,282,821) | 908,259) | 930,729) | 518,903) | 371,474) | |
| Balance-sheet-based aggregate accruals2 | 1,374,562) | (22,470) | 411,826) | 147,429) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 86.15% | -2.44% | 56.82% | 33.12% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Advanced Micro Devices Inc. | 2.94% | 2.36% | 169.75% | 8.05% | — | |
| Analog Devices Inc. | -2.83% | 0.03% | -2.94% | 90.70% | -2.85% | |
| Applied Materials Inc. | 4.18% | 0.48% | 20.73% | 17.33% | 3.75% | |
| Broadcom Inc. | 87.89% | -1.58% | -5.37% | -8.72% | 8.42% | |
| Intel Corp. | -0.91% | 13.69% | 10.73% | 11.61% | — | |
| KLA Corp. | -1.32% | 3.95% | 21.25% | 3.62% | -4.49% | |
| Lam Research Corp. | -2.70% | 1.57% | 16.02% | 8.38% | 9.01% | |
| Micron Technology Inc. | 5.22% | 0.78% | 12.07% | 11.51% | 7.56% | |
| NVIDIA Corp. | 29.90% | 18.88% | 28.31% | 115.40% | — | |
| Qualcomm Inc. | 7.33% | -5.53% | 68.49% | 22.56% | 20.94% | |
| Texas Instruments Inc. | 15.89% | 31.37% | 22.75% | 18.48% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | 19.65% | 6.33% | 24.66% | 19.53% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | 21.42% | 8.98% | 18.09% | 19.16% | — | |
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
= 2,754,151 – 471,330 = 2,282,821
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 2,282,821 – 908,259 = 1,374,562
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,374,562 ÷ [(2,282,821 + 908,259) ÷ 2] = 86.15%
4 Click competitor name to see calculations.
The data reveals significant fluctuations in key financial measures over the four-year period under review. First, net operating assets exhibit an overall increasing trend with some volatility. Starting from 518,903 thousand US dollars in 2021, net operating assets nearly doubled by 2022 reaching 930,729 thousand US dollars. There is a slight decline to 908,259 thousand US dollars in 2023, followed by a substantial increase to 2,282,821 thousand US dollars in 2024. This indicates an aggressive expansion or increased investment in operating assets in the latest period.
Balance-sheet-based aggregate accruals display high variability and even switch signs across the periods. In 2021, the accruals stood at 147,429 thousand US dollars and sharply rose to 411,826 thousand US dollars in 2022, showing increased accrual activity. In 2023, this measure turns negative at -22,470 thousand US dollars, suggesting a reversal or reduction in accruals. In 2024, the figure dramatically escalates to 1,374,562 thousand US dollars, indicating a large buildup of accruals that could imply aggressive earnings management or significant changes in accounting estimates or policies.
The balance-sheet-based accruals ratio, expressed as a percentage of net operating assets, mirrors the behavior of aggregate accruals but highlights the proportional impact relative to operating assets. This ratio starts relatively high at 33.12% in 2021 and further increases to 56.82% in 2022. It falls to a slight negative value of -2.44% in 2023, reflecting the negative aggregate accrual value. However, the ratio then surges impressively to 86.15% in 2024, suggesting a markedly high level of accruals relative to the company’s net operating assets. Such a percentage indicates substantial accrual-based adjustments which might affect the quality of the reported earnings and warrant closer scrutiny regarding earnings sustainability and the potential for earnings manipulation.
Overall, the data presents a pattern of marked volatility especially in accrual-related measures, with an especially pronounced increase in both net operating assets and accrual ratios in the latest period. This could signal changes in business operations, accounting estimates, or financial reporting strategies. The negative accrual value in 2023 is an inflection point that contrasts with other years’ positive values, drawing attention to potential significant accounting adjustments during that period. The increasing magnitude of accruals relative to operating assets in 2024 is particularly notable for assessing financial reporting quality.
Cash-Flow-Statement-Based Accruals Ratio
Monolithic Power Systems Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net income | 1,786,700) | 427,374) | 437,672) | 242,023) | 164,375) | |
| Less: Net cash provided by operating activities | 788,410) | 638,213) | 246,674) | 320,010) | 267,803) | |
| Less: Net cash (used in) provided by investing activities | 223,047) | (178,726) | (12,510) | (378,886) | (39,177) | |
| Cash-flow-statement-based aggregate accruals | 775,243) | (32,113) | 203,508) | 300,899) | (64,251) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 48.59% | -3.49% | 28.08% | 67.59% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Advanced Micro Devices Inc. | -0.56% | 1.17% | -15.28% | 8.10% | — | |
| Analog Devices Inc. | -2.71% | -0.57% | -2.54% | -11.85% | -3.72% | |
| Applied Materials Inc. | 5.35% | -2.05% | 18.18% | 14.75% | -0.54% | |
| Broadcom Inc. | 10.29% | -6.71% | -8.94% | -12.34% | 3.65% | |
| Intel Corp. | -6.58% | 11.35% | 2.75% | 15.15% | — | |
| KLA Corp. | 16.82% | 3.66% | 18.30% | 9.27% | -7.11% | |
| Lam Research Corp. | -5.83% | -1.71% | 12.43% | 3.89% | 6.35% | |
| Micron Technology Inc. | 1.18% | -2.52% | 11.37% | 10.01% | 5.45% | |
| NVIDIA Corp. | 52.67% | -47.90% | 73.13% | 233.25% | — | |
| Qualcomm Inc. | 5.53% | -14.57% | 46.91% | 15.61% | 48.48% | |
| Texas Instruments Inc. | 7.93% | 26.35% | 28.24% | 29.95% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | 3.46% | 0.45% | 7.45% | 12.36% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | 6.29% | 1.46% | 2.91% | 8.62% | — | |
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 × 775,243 ÷ [(2,282,821 + 908,259) ÷ 2] = 48.59%
2 Click competitor name to see calculations.
The data indicates significant variations in the financial reporting quality measures over the four-year period under review.
- Net Operating Assets
- The net operating assets exhibit a generally upward trend, starting at approximately 518.9 million US dollars at the end of 2021 and increasing notably to 930.7 million in 2022. There is a slight decline in 2023, where the value decreases to about 908.3 million. However, a substantial increase is observed in 2024, reaching over 2.28 billion US dollars. This sharp rise in the final year suggests significant asset growth or acquisitions impacting the operating asset base.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals display considerable volatility throughout the period. They begin at approximately 300.9 million US dollars in 2021, decrease to 203.5 million in 2022, and decline further to a negative figure of about -32.1 million in 2023, indicating a reversal or adjustment in accruals. In 2024, accruals increase markedly to approximately 775.2 million US dollars, which is the highest value recorded. This fluctuation reflects changing recognition patterns in accrued revenues and expenses, possibly due to altered operational dynamics or accounting treatments.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrors the trend seen in aggregate accruals, beginning at 67.59% in 2021 and decreasing significantly to 28.08% in 2022. It reaches a negative value of -3.49% in 2023, corresponding to the negative accruals in that year, and subsequently rebounds to 48.59% in 2024. These shifts suggest changes in the proportion of accruals relative to net operating assets, highlighting fluctuations in earnings quality and the timing of revenue and expense recognition.
Overall, the data reveals a pattern of increasing net operating assets with considerable variability in accruals and their relative ratio, implying dynamic changes in operational and accounting activities that affect financial reporting quality over the analyzed period.