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
Caterpillar Inc., 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 | 87,764) | 87,476) | 81,943) | 82,793) | 78,324) | |
| Less: Cash and cash equivalents | 6,889) | 6,978) | 7,004) | 9,254) | 9,352) | |
| Operating assets | 80,875) | 80,498) | 74,939) | 73,539) | 68,972) | |
| Operating Liabilities | ||||||
| Total liabilities | 68,270) | 67,973) | 66,052) | 66,277) | 62,946) | |
| Less: Short-term borrowings | 4,393) | 4,643) | 5,957) | 5,404) | 2,015) | |
| Less: Long-term debt due within one year | 6,665) | 8,763) | 5,322) | 6,352) | 9,149) | |
| Less: Long-term debt due after one year | 27,351) | 24,472) | 25,714) | 26,033) | 25,999) | |
| Operating liabilities | 29,861) | 30,095) | 29,059) | 28,488) | 25,783) | |
| Net operating assets1 | 51,014) | 50,403) | 45,880) | 45,051) | 43,189) | |
| Balance-sheet-based aggregate accruals2 | 611) | 4,523) | 829) | 1,862) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 1.20% | 9.40% | 1.82% | 4.22% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Boeing Co. | 21.29% | -22.39% | -12.09% | 30.23% | — | |
| Eaton Corp. plc | -0.49% | 2.18% | 2.87% | 10.92% | — | |
| GE Aerospace | -10.31% | -50.58% | -7.82% | -33.29% | — | |
| Honeywell International Inc. | 30.89% | 7.21% | -1.99% | 9.04% | — | |
| Lockheed Martin Corp. | 5.40% | 2.60% | 15.67% | 23.38% | — | |
| RTX Corp. | -1.06% | -1.23% | 1.57% | 1.48% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Capital Goods | 4.71% | -5.90% | -0.33% | -0.06% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | 4.97% | -1.04% | 0.29% | 3.43% | — | |
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
= 80,875 – 29,861 = 51,014
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 51,014 – 50,403 = 611
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 611 ÷ [(51,014 + 50,403) ÷ 2] = 1.20%
4 Click competitor name to see calculations.
- Net Operating Assets
- Over the four-year period, net operating assets showed a general upward trend. Starting at 45,051 million USD at the end of 2021, this figure increased modestly to 45,880 million USD in 2022, then experienced a more significant rise to 50,403 million USD by the end of 2023. The growth continued but at a slower pace, reaching 51,014 million USD in 2024. The overall increase suggests expanding operational capacity or investment in operating assets.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals exhibited notable volatility across the periods. In 2021, accruals stood at 1,862 million USD before declining sharply to 829 million USD in 2022. However, in 2023, accruals surged dramatically to 4,523 million USD, representing a significant spike. This sharp increase was followed by a pronounced reduction to 611 million USD in 2024. The large fluctuation in accruals implies variable adjustments or timing differences in recognizing revenues and expenses.
- Balance-sheet-based Accruals Ratio
- The accruals ratio mirrored the pattern of aggregate accruals, with its magnitude shifting considerably over the years. Beginning at 4.22% in 2021, it dropped to 1.82% in 2022, then escalated sharply to 9.4% in 2023, the highest in the reported period. This high point was followed by a steep decline to 1.2% in 2024, the lowest ratio recorded. The ratio's volatility indicates fluctuations in earnings quality and the extent of accrual-based earnings adjustments during these years.
Cash-Flow-Statement-Based Accruals Ratio
Caterpillar Inc., 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 | ||
|---|---|---|---|---|---|---|
| Profit attributable to common stockholders | 10,792) | 10,335) | 6,705) | 6,489) | 2,998) | |
| Less: Net cash provided by operating activities | 12,035) | 12,885) | 7,766) | 7,198) | 6,327) | |
| Less: Net cash used for investing activities | (2,453) | (5,871) | (2,541) | (3,084) | (1,485) | |
| Cash-flow-statement-based aggregate accruals | 1,210) | 3,321) | 1,480) | 2,375) | (1,844) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 2.39% | 6.90% | 3.26% | 5.38% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Boeing Co. | 57.20% | -26.69% | -50.32% | -43.09% | — | |
| Eaton Corp. plc | -1.02% | 8.52% | 4.55% | 7.52% | — | |
| GE Aerospace | 5.07% | -8.42% | -15.92% | -53.22% | — | |
| Honeywell International Inc. | 28.68% | 5.80% | -0.79% | 2.16% | — | |
| Lockheed Martin Corp. | 0.66% | 3.08% | -1.36% | -10.24% | — | |
| RTX Corp. | -0.87% | -1.66% | 0.87% | -1.96% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Capital Goods | 8.44% | -0.94% | -5.98% | -13.86% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | 5.29% | 1.67% | -2.31% | -8.91% | — | |
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 × 1,210 ÷ [(51,014 + 50,403) ÷ 2] = 2.39%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited a steady upward trend over the four-year period. Starting at 45,051 million US dollars at the end of 2021, this figure increased to 45,880 million in 2022, followed by a more pronounced rise to 50,403 million in 2023, and a further increment to 51,014 million in 2024. The progression indicates a consistent expansion in the company's net operating asset base, reflecting potential growth in operational capacity or asset acquisition.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals demonstrated considerable variability throughout the period. Initially, the accruals were recorded at 2,375 million US dollars in 2021, then declined significantly to 1,480 million in 2022. The figure surged to 3,321 million in 2023, indicating an increased level of accruals in that year, before retreating sharply to 1,210 million in 2024. This volatility suggests fluctuations in the timing differences between reported earnings and actual cash flows, potentially impacting earnings quality.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, reflecting the proportion of accruals relative to net operating assets, mirrored the fluctuations observed in aggregate accruals. It started at 5.38% in 2021, decreased to 3.26% in 2022, rose markedly to 6.9% in 2023, and then declined to a low of 2.39% in 2024. These variations suggest inconsistent use of accruals from year to year, with the highest ratio occurring in 2023, potentially signaling a year with reduced earnings quality due to increased accruals compared to other periods.