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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EQT Corp. pages available for free this week:
- Income Statement
- Balance Sheet: Assets
- Common-Size Income Statement
- Analysis of Short-term (Operating) Activity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Enterprise Value (EV)
- Capital Asset Pricing Model (CAPM)
- Return on Equity (ROE) since 2005
- Price to Operating Profit (P/OP) since 2005
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
EQT Corp., balance sheet computation of aggregate accruals
US$ in thousands
| 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: Current portion of debt | ||||||
| Less: Credit facility borrowings | ||||||
| Less: Term Loan Facility borrowings | ||||||
| Less: Senior notes | ||||||
| Less: Note payable to EQM Midstream Partners, LP | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Chevron Corp. | ||||||
| ConocoPhillips | ||||||
| Exxon Mobil Corp. | ||||||
| Occidental Petroleum Corp. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Energy | ||||||
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (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 exhibit a fluctuating trend over the analyzed period. Beginning at approximately 16.45 billion US dollars at the end of 2018, this figure declined notably to about 15.09 billion in 2019 and further decreased to around 14.17 billion in 2020. However, in 2021, there was a recovery, with net operating assets rising to approximately 15.42 billion. This pattern indicates an initial contraction in operating asset base followed by a partial rebound in the most recent year observed.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals demonstrate a significant shift in magnitude and sign throughout the period. In 2018, accrued liabilities or adjustments were strongly negative at roughly -7.93 billion US dollars, which sharply moderated to -1.36 billion in 2019 and further to -0.92 billion in 2020. In 2021, the figure transitioned to a positive 1.25 billion, indicating a reversal from prior negative accruals to positive accruals for that year. This trend reveals substantial variation in accrual accounting adjustments or timing differences impacting reported performance.
- Balance-Sheet-Based Accruals Ratio (%)
- Mirroring the aggregate accruals, the accruals ratio shifts considerably, reflecting changing proportions of accruals relative to net operating assets. The ratio began at -38.85% in 2018, signaling a large negative accrual component relative to the asset base. It decreased in magnitude to -8.62% in 2019 and then to -6.3% in 2020, indicating diminishing negative accrual influences. By 2021, the ratio reversed into positive territory at 8.43%, consistent with the positive aggregate accruals reported. This movement suggests changes in earnings quality or accounting practices affecting how economic activities are recognized through accruals.
Cash-Flow-Statement-Based Accruals Ratio
EQT Corp., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to EQT Corporation | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash used in investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Chevron Corp. | ||||||
| ConocoPhillips | ||||||
| Exxon Mobil Corp. | ||||||
| Occidental Petroleum Corp. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Energy | ||||||
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (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 analysis of the annual financial reporting quality measures reveals several notable trends over the four-year period ending December 31, 2021.
- Net Operating Assets
- The net operating assets show a declining trend from 2018 to 2020, decreasing from approximately 16.45 billion US dollars to 14.17 billion US dollars. This represents a reduction of around 13.9% over two years. However, in 2021, there is a reversal of this trend with net operating assets increasing to about 15.42 billion US dollars, indicating a partial recovery or expansion of operational capacity.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals, which reflect the non-cash components of earnings, are negative throughout the period, ranging between approximately -1.47 billion and -0.75 billion US dollars. The absolute value of these accruals decreases steadily each year from 2019 onwards, moving from -1.47 billion in 2019 down to -0.75 billion by 2021. This downward movement in the magnitude of negative accruals suggests an improvement in the quality of earnings, as smaller accruals typically indicate less earnings management.
- Cash-Flow-Statement-Based Accruals Ratio
- Corresponding with aggregate accruals, the accruals ratio remains negative but shows a consistent improvement over the observed timeframe. It decreases in magnitude from -9.33% in 2019 to -5.04% in 2021, indicating a reduction in the proportion of accruals relative to net operating assets. This trend further supports the inference of improving earnings quality as accruals become a smaller part of operating assets.
Overall, the data suggest a contracting base of net operating assets through 2020 followed by a recovery in 2021, alongside a consistent improvement in accrual measures, which may reflect strengthening financial reporting quality. The reduction in negative accruals and their ratio over the period highlights a move towards higher earnings persistence and lesser dependence on accounting adjustments.