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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- Analysis of Solvency Ratios
- Enterprise Value to EBITDA (EV/EBITDA)
- Price to FCFE (P/FCFE)
- Present Value of Free Cash Flow to Equity (FCFE)
- Net Profit Margin since 2010
- Current Ratio since 2010
- Total Asset Turnover since 2010
- Price to Operating Profit (P/OP) since 2010
- Price to Book Value (P/BV) since 2010
- Price to Sales (P/S) since 2010
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Balance-Sheet-Based Accruals Ratio
Generac Holdings Inc., 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: Short-term borrowings | ||||||
| Less: Current portion of long-term borrowings and finance lease obligations | ||||||
| Less: Long-term borrowings and finance lease obligations, 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. | ||||||
| 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: 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 have shown a consistent increase over the period analyzed. Starting from approximately 1.52 billion US dollars at the end of 2018, the value rose moderately to about 1.67 billion in 2019 and 1.69 billion in 2020. By the end of 2021, there was a substantial increase, with net operating assets reaching approximately 3.10 billion, nearly doubling the previous year's figure. This upward trend indicates significant asset growth and potentially higher operational scale or investment during 2021.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals exhibit a somewhat volatile pattern. From 127.7 million US dollars at the end of 2018, the figure increased to 148.3 million in 2019, showing a rise in accrued liabilities or deferred items. In 2020, there was a sharp decrease to 16.4 million, indicating either reduced accrual activity or potentially a temporary adjustment. However, in 2021, there was a dramatic surge to approximately 1.42 billion, which corresponds with the marked increase in net operating assets, suggesting a significant shift in accrual accounting or working capital management.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, calculated as a percentage, illustrates notable fluctuations. For 2018 and 2019, the ratios were relatively stable and low, at 8.76% and 9.29%, respectively, reflecting moderate accrual levels relative to net operating assets. In 2020, this ratio declined sharply to 0.98%, confirming the previously observed reduction in aggregate accruals. The most significant change occurred in 2021, where the ratio escalated dramatically to 59.21%. This substantial increase signals that the proportion of accruals relative to net operating assets has grown markedly, which could impact the quality of earnings and warrants closer examination of the underlying causes of such accrual behavior.
Cash-Flow-Statement-Based Accruals Ratio
Generac Holdings Inc., 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 attributable to Generac Holdings Inc. | ||||||
| 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 | ||||||
| Boeing Co. | ||||||
| Caterpillar Inc. | ||||||
| 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: 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.
- Net Operating Assets
- The net operating assets demonstrate a generally increasing trend over the observed period. Starting from approximately $1.52 billion in 2018, the value increased moderately to around $1.67 billion in 2019 and showed a slight further increase to about $1.69 billion in 2020. A significant jump is observed in 2021, almost doubling to approximately $3.10 billion. This indicates a substantial expansion in the company's operational asset base by the end of the period.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals exhibit variability and a dramatic change in 2021. Accruals rose from about $99.9 million in 2018 to $113.2 million in 2019, suggesting increasing accrual activities. However, in 2020, this item turned negative to approximately -$11.9 million, indicating a reversal or reduction of accrued amounts. In 2021, there was a marked and sharp increase to roughly $956.6 million, reflecting a substantial rise in accruals within cash flows for that year.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, expressed as a percentage, follows a pattern mirroring the aggregate accruals. It increased slightly from 6.85% in 2018 to 7.09% in 2019, showing stable accrual levels in relation to cash flows. In 2020, the ratio turned negative to -0.71%, consistent with the negative aggregate accruals, indicating an unusual or potentially corrective movement in accrual accounting. In 2021, the ratio surged significantly to 39.93%, highlighting an exceptionally high proportion of accruals relative to cash flows, which could warrant further inquiry into the underlying factors driving such a sharp increase.