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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Balance-Sheet-Based Accruals Ratio
Caterpillar Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term borrowings | ||||||
| Less: Long-term debt due within one year | ||||||
| Less: Long-term debt due after one year | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Boeing Co. | ||||||
| Eaton Corp. plc | ||||||
| GE Aerospace | ||||||
| Honeywell International Inc. | ||||||
| Lockheed Martin Corp. | ||||||
| RTX Corp. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Capital Goods | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | ||||||
Based on: 10-K (reporting date: 2025-12-31), 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).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= – =
3 2025 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 information presents a review of net operating assets, aggregate accruals, and the resulting accruals ratio over a four-year period. Net operating assets demonstrate a consistent upward trend throughout the period, increasing from US$45,880 million in 2022 to US$54,668 million in 2025. However, balance-sheet-based aggregate accruals and the accruals ratio exhibit more volatility.
- Aggregate Accruals
- Balance-sheet-based aggregate accruals increased significantly from US$829 million in 2022 to US$4,523 million in 2023. This represents a substantial rise in accruals relative to the prior year. Following this peak, accruals decreased to US$611 million in 2024 before increasing again to US$3,654 million in 2025. This pattern suggests potential fluctuations in the timing of revenue and expense recognition.
- Accruals Ratio
- The balance-sheet-based accruals ratio mirrors the trend in aggregate accruals. It rose sharply from 1.82% in 2022 to 9.40% in 2023, indicating a greater proportion of earnings derived from accruals rather than cash flow. The ratio then declined to 1.20% in 2024, suggesting a return towards more cash-based earnings. However, the ratio increased substantially again in 2025, reaching 6.92%.
The considerable volatility in both aggregate accruals and the accruals ratio warrants further investigation. The significant increase in 2023 and again in 2025, coupled with the subsequent declines, could indicate aggressive accounting practices, changes in working capital management, or other factors impacting the relationship between reported earnings and underlying cash flows. A deeper analysis, including comparison to industry peers and examination of the underlying components of accruals, is recommended to assess the quality of earnings and potential risks.
Cash-Flow-Statement-Based Accruals Ratio
Caterpillar Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Profit attributable to common stockholders | ||||||
| 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 | ||||||
| Boeing Co. | ||||||
| Eaton Corp. plc | ||||||
| GE Aerospace | ||||||
| Honeywell International Inc. | ||||||
| Lockheed Martin Corp. | ||||||
| RTX Corp. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Capital Goods | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Industrials | ||||||
Based on: 10-K (reporting date: 2025-12-31), 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).
1 2025 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 net operating assets exhibited a consistent upward trend over the four-year period, increasing from US$45,880 million in 2022 to US$54,668 million in 2025. Fluctuations were observed in the cash-flow-statement-based aggregate accruals and the corresponding accruals ratio, indicating varying levels of earnings quality as measured by this metric.
- Cash-Flow-Statement-Based Aggregate Accruals
- Cash-flow-statement-based aggregate accruals increased significantly from US$1,480 million in 2022 to US$3,321 million in 2023, representing a substantial rise. However, these accruals decreased to US$1,210 million in 2024 before increasing again to US$1,852 million in 2025. This pattern suggests potential volatility in the non-cash components of net income.
- Cash-Flow-Statement-Based Accruals Ratio
- The cash-flow-statement-based accruals ratio mirrored the trend in aggregate accruals. It rose from 3.26% in 2022 to 6.90% in 2023, a considerable increase. A subsequent decline to 2.39% occurred in 2024, followed by an increase to 3.50% in 2025. A higher accruals ratio may indicate a greater reliance on accruals to report earnings, potentially signaling lower earnings quality. The ratio in 2023 is notably higher than in the other years examined.
- Relationship between Net Operating Assets and Accruals
- While net operating assets consistently increased, the accruals ratio did not follow the same trajectory. The divergence between the growth in operating assets and the fluctuations in the accruals ratio suggests that the increase in assets was not consistently supported by cash flows, and that accrual accounting played a varying role in reported performance. The peak in the accruals ratio in 2023, despite continued growth in net operating assets, warrants further investigation.
The observed patterns in accruals and the accruals ratio suggest a need for continued monitoring to assess the sustainability of reported earnings and the potential for earnings manipulation. Further analysis, incorporating industry benchmarks and qualitative factors, would provide a more comprehensive understanding of the financial reporting quality.