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
Eaton Corp. plc, 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 | ||||||
| Less: Cash | ||||||
| Less: Short-term investments | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term debt | ||||||
| Less: Current portion of long-term debt | ||||||
| Less: Long-term debt, excluding current portion | ||||||
| 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. | ||||||
| Caterpillar Inc. | ||||||
| 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: 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 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= – =
3 2024 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 showed a consistent increase from US$24,462 million at the end of 2021 to US$25,729 million by the end of 2023. However, in 2024, there was a slight decrease to US$25,602 million, indicating a stabilization or marginal contraction in the asset base after several years of growth.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals amount displayed a sharp decline over the four-year period. Starting from US$2,533 million in 2021, the figure dropped significantly to US$712 million in 2022 and further reduced to US$555 million in 2023. In 2024, the accruals turned negative, reaching -US$127 million, which suggests an unusual reversal or a significant adjustment that decreased accruals below zero.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, which measures the proportion of accruals relative to net operating assets, declined markedly from 10.92% at the end of 2021 to 2.87% in 2022. This downward trend continued to 2.18% in 2023, followed by a drop to a negative value of -0.49% in 2024. The ratio's progression points to a reduction in the extent of accruals compared to assets, ultimately resulting in a net negative accrual position in the latest period.
- Summary of Trends
- Overall, the data indicates that while net operating assets grew steadily until 2023 and slightly declined thereafter, the balance-sheet-based accruals and their ratio to assets have been consistently decreasing, culminating in negative values by 2024. This pattern may reflect improved earnings quality or changes in accounting policies, suggesting lower reliance on accrual accounting or adjustments impacting the reported accruals. The negative accrual ratio in the final period merits further investigation to understand the underlying causes and their potential implications on financial reporting quality.
Cash-Flow-Statement-Based Accruals Ratio
Eaton Corp. plc, cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Eaton ordinary shareholders | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash (used in) 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 | ||||||
| Boeing Co. | ||||||
| Caterpillar Inc. | ||||||
| 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: 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 × ÷ [( + ) ÷ 2] =
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets increased steadily from US$24,462 million in 2021 to US$25,729 million in 2023, reflecting consistent growth over the three-year period. However, in 2024, there was a slight decline to US$25,602 million, indicating a small contraction after several years of expansion.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals exhibited notable volatility across the four years. In 2021, the accruals were US$1,745 million, followed by a decrease to US$1,129 million in 2022, suggesting a reduction in non-cash earnings components or adjustments. In 2023, accruals surged significantly to US$2,169 million, indicating increased adjustments or potential earnings management elements. In 2024, the figure sharply reversed to a negative value of -US$262 million, pointing to an unusual outflow or correction in accrual accounting.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, representing accruals as a percentage of net operating assets, largely mirrors the behavior seen in aggregate accruals but provides a relative scale. It declined from 7.52% in 2021 to 4.55% in 2022, showing reduced accrual intensity. The ratio increased substantially to 8.52% in 2023, consistent with the surge in aggregate accruals. In 2024, the ratio turned negative at -1.02%, which is notable and unusual, indicating a reversal of accruals effect on cash flows relative to the asset base that year.
- Overall Insights
- The data suggest that while net operating assets grew steadily through 2023 and showed slight contraction in 2024, accruals and accrual ratios demonstrated significant fluctuations. The sharp rise and subsequent negative reversal in accruals and their ratio in the last two years could reflect changing accounting treatments, earnings adjustments, or operational cash flow dynamics. These fluctuations warrant further investigation as they impact the quality and sustainability of earnings reflected in the financial statements.