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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NXP Semiconductors N.V. pages available for free this week:
- Statement of Comprehensive Income
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Profitability Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Enterprise Value (EV)
- Price to FCFE (P/FCFE)
- Net Profit Margin since 2010
- Return on Equity (ROE) since 2010
- Return on Assets (ROA) since 2010
- Price to Sales (P/S) since 2010
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Balance-Sheet-Based Accruals Ratio
NXP Semiconductors N.V., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term debt | ||||||
| Less: Long-term debt | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Advanced Micro Devices Inc. | ||||||
| Analog Devices Inc. | ||||||
| Applied Materials Inc. | ||||||
| Broadcom Inc. | ||||||
| Intel Corp. | ||||||
| KLA Corp. | ||||||
| Lam Research Corp. | ||||||
| Micron Technology Inc. | ||||||
| NVIDIA Corp. | ||||||
| Qualcomm Inc. | ||||||
| Texas Instruments Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Information Technology | ||||||
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 20-F (reporting date: 2018-12-31), 20-F (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 demonstrated a generally stable trend over the four-year period. Starting at 15,255 million USD at the end of 2018, the figure increased slightly to 15,975 million USD in 2019. However, in 2020, there was a noticeable decline to 14,485 million USD, followed by a marginal increase to 14,512 million USD in 2021. This indicates some variability but overall moderate stability in net operating assets.
- Balance-sheet-based aggregate accruals
- The balance-sheet-based aggregate accruals exhibited significant volatility. In 2018, the accruals were negative at -1,479 million USD, turning positive to 720 million USD in 2019. This was followed by a sharp reversal back to -1,490 million USD in 2020, and then a near-neutral value of 27 million USD in 2021. Such fluctuations suggest inconsistency in the accrual components affecting earnings quality.
- Balance-sheet-based accruals ratio
- The accruals ratio mirrored the volatility observed in the aggregate accruals. It started with a negative ratio of -9.25% in 2018, shifted to a positive 4.61% in 2019, dropped to -9.78% in 2020, and approached zero at 0.19% in 2021. This alternating pattern between negative and positive values reflects varying levels of accrual-based adjustments as a proportion of net operating assets, which may impact the perception of earnings quality across the evaluated years.
Cash-Flow-Statement-Based Accruals Ratio
NXP Semiconductors N.V., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income attributable to stockholders | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash (used for) 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 | ||||||
| Advanced Micro Devices Inc. | ||||||
| Analog Devices Inc. | ||||||
| Applied Materials Inc. | ||||||
| Broadcom Inc. | ||||||
| Intel Corp. | ||||||
| KLA Corp. | ||||||
| Lam Research Corp. | ||||||
| Micron Technology Inc. | ||||||
| NVIDIA Corp. | ||||||
| Qualcomm Inc. | ||||||
| Texas Instruments Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Semiconductors & Semiconductor Equipment | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Information Technology | ||||||
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 20-F (reporting date: 2018-12-31), 20-F (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 data exhibits a noteworthy variation in the company's net operating assets, cash-flow-statement-based aggregate accruals, and the accruals ratio over the four-year period ending December 31, 2021.
- Net Operating Assets
- The net operating assets displayed an overall modest fluctuation, increasing from 15,255 million US dollars at the end of 2018 to a peak of 15,975 million in 2019, followed by a decline to 14,485 million in 2020 and a slight recovery to 14,512 million in 2021. This suggests a relative stabilization in the operational asset base after an initial growth phase, with a peak in 2019 followed by a contraction that may reflect changes in operational capacity or asset utilization efficiency.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals showed significant variability and volatility throughout the period. The value was negative (−1,639 million US dollars) at the end of 2018, turned positive to 154 million in 2019, then reverted sharply to a large negative figure (−2,012 million) by the end of 2020, and reduced in negativity to −272 million in 2021. This oscillation indicates unstable earnings quality, with potentially large non-cash earnings components influencing profit measures, particularly in 2020 where the large negative accruals suggest considerable adjustments or reversals affecting reported earnings.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrored the behavior of aggregate accruals, starting at −10.25% in 2018, shifting to a small positive 0.99% in 2019, then declining sharply to −13.21% in 2020 before improving but remaining negative at −1.88% in 2021. The negative ratios, especially the pronounced dip in 2020, imply that the quality of earnings was diminished due to significant accruals relative to cash flows, potentially signaling higher earnings management or accounting adjustments during that year.
Overall, the data suggests that although the company's net operating assets remained relatively stable with minor fluctuations, earnings quality as measured by accruals experienced notable volatility. Particularly, 2020 stands out as a year with considerably high negative accruals and a deteriorated accruals ratio, indicating potential concerns regarding the sustainability or reliability of earnings during that period. The slight improvement in 2021 may reflect efforts to normalize earnings quality, although the accruals ratio remained negative, signaling ongoing scrutiny of earnings composition.