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
Hewlett Packard Enterprise Co., balance sheet computation of aggregate accruals
US$ in millions
| Oct 31, 2023 | Oct 31, 2022 | Oct 31, 2021 | Oct 31, 2020 | Oct 31, 2019 | Oct 31, 2018 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 57,153) | 57,123) | 57,699) | 54,015) | 51,803) | 55,493) | |
| Less: Cash and cash equivalents | 4,270) | 4,163) | 3,996) | 4,233) | 3,753) | 4,880) | |
| Operating assets | 52,883) | 52,960) | 53,703) | 49,782) | 48,050) | 50,613) | |
| Operating Liabilities | |||||||
| Total liabilities | 35,915) | 37,214) | 37,682) | 37,919) | 34,654) | 34,219) | |
| Less: Notes payable and short-term borrowings | 4,868) | 4,612) | 3,552) | 3,755) | 4,425) | 2,005) | |
| Less: Long-term debt | 7,487) | 7,853) | 9,896) | 12,186) | 9,395) | 10,136) | |
| Operating liabilities | 23,560) | 24,749) | 24,234) | 21,978) | 20,834) | 22,078) | |
| Net operating assets1 | 29,323) | 28,211) | 29,469) | 27,804) | 27,216) | 28,535) | |
| Balance-sheet-based aggregate accruals2 | 1,112) | (1,258) | 1,665) | 588) | (1,319) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 3.87% | -4.36% | 5.81% | 2.14% | -4.73% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Apple Inc. | -9.04% | -2.12% | 36.09% | — | — | — | |
| Arista Networks Inc. | 17.14% | 106.22% | — | — | — | — | |
| Cisco Systems Inc. | -12.09% | 5.96% | 20.24% | — | — | — | |
| Dell Technologies Inc. | 12.16% | -89.81% | — | — | — | — | |
| Super Micro Computer Inc. | 3.74% | 58.35% | 8.42% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Technology Hardware & Equipment | -6.96% | -13.35% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Information Technology | 8.92% | 18.19% | 200.00% | — | — | — | |
Based on: 10-K (reporting date: 2023-10-31), 10-K (reporting date: 2022-10-31), 10-K (reporting date: 2021-10-31), 10-K (reporting date: 2020-10-31), 10-K (reporting date: 2019-10-31), 10-K (reporting date: 2018-10-31).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 52,883 – 23,560 = 29,323
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 29,323 – 28,211 = 1,112
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,112 ÷ [(29,323 + 28,211) ÷ 2] = 3.87%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets showed an overall upward trend over the five-year period. Starting at 27,216 million USD in 2019, the figure increased gradually to 29,323 million USD by 2023, with a slight decline in 2022. This indicates a relatively stable expansion in the company's operating asset base, reflecting possible investments or growth in core operations.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals demonstrated volatility throughout the period. The value was negative in 2019 (-1,319 million USD), turned positive in 2020 and 2021 (588 million and 1,665 million USD respectively), then shifted back to a negative figure in 2022 (-1,258 million USD), before rising again to a positive figure in 2023 (1,112 million USD). This fluctuation highlights inconsistent accrual management, with alternating periods of conservative and aggressive recognition of earnings components.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrored the pattern of aggregate accruals, fluctuating between negative and positive values. It started at -4.73% in 2019, increased to a peak of 5.81% in 2021, then declined to -4.36% in 2022, and rose again to 3.87% in 2023. These variations suggest changing earnings quality or differences in accrual accounting, which may impact the reliability of earnings over the years.
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Cash-Flow-Statement-Based Accruals Ratio
Hewlett Packard Enterprise Co., cash flow statement computation of aggregate accruals
US$ in millions
| Oct 31, 2023 | Oct 31, 2022 | Oct 31, 2021 | Oct 31, 2020 | Oct 31, 2019 | Oct 31, 2018 | ||
|---|---|---|---|---|---|---|---|
| Net earnings (loss) attributable to HPE | 2,025) | 868) | 3,427) | (322) | 1,049) | 1,908) | |
| Less: Net cash provided by operating activities | 4,428) | 4,593) | 5,871) | 2,240) | 3,997) | 2,964) | |
| Less: Net cash used in investing activities | (3,284) | (2,087) | (2,796) | (2,578) | (3,457) | (2,071) | |
| Cash-flow-statement-based aggregate accruals | 881) | (1,638) | 352) | 16) | 509) | 1,015) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 3.06% | -5.68% | 1.23% | 0.06% | 1.83% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Apple Inc. | -14.62% | 0.00% | 4.86% | — | — | — | |
| Arista Networks Inc. | 36.37% | 52.90% | — | — | — | — | |
| Cisco Systems Inc. | -7.65% | -10.18% | 1.64% | — | — | — | |
| Dell Technologies Inc. | 11.23% | -20.97% | — | — | — | — | |
| Super Micro Computer Inc. | 0.89% | 56.84% | 5.08% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Technology Hardware & Equipment | -10.03% | -4.10% | -1.31% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Information Technology | 1.40% | 2.99% | 15.96% | — | — | — | |
Based on: 10-K (reporting date: 2023-10-31), 10-K (reporting date: 2022-10-31), 10-K (reporting date: 2021-10-31), 10-K (reporting date: 2020-10-31), 10-K (reporting date: 2019-10-31), 10-K (reporting date: 2018-10-31).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 881 ÷ [(29,323 + 28,211) ÷ 2] = 3.06%
2 Click competitor name to see calculations.
- Net operating assets
- The net operating assets showed a generally upward trend from 2019 to 2023. Starting at 27,216 million USD in 2019, the value increased slightly to 27,804 million USD in 2020, followed by a more notable rise to 29,469 million USD in 2021. In 2022, there was a slight decline to 28,211 million USD, but the figure recovered again in 2023 to 29,323 million USD, approaching the peak observed in 2021. Overall, the net operating assets demonstrated relative stability with moderate growth over the five-year period.
- Cash-flow-statement-based aggregate accruals
- The aggregate accruals exhibited significant volatility during the period. In 2019, the accruals were at 509 million USD and dropped drastically to 16 million USD in 2020, indicating a sharp decrease. In 2021, accruals rebounded to 352 million USD but markedly fell into negative territory in 2022, reaching -1,638 million USD. The negative value suggests a strong reversal in accruals during that year. By 2023, the accruals rose sharply again to 881 million USD. This pattern indicates fluctuations in the timing and recognition of revenues and expenses affecting the cash flow components of earnings.
- Cash-flow-statement-based accruals ratio
- The accruals ratio, which reflects the aggregate accruals as a percentage of net operating assets, mirrored the volatility seen in the aggregate accrual values. It started at 1.83% in 2019, declined steeply to 0.06% in 2020, and then increased to 1.23% in 2021. In 2022, the ratio turned negative to -5.68%, consistent with the large negative accruals that year, indicating a significant departure from typical accrual behavior. By 2023, the ratio reversed again to a positive 3.06%. This oscillation suggests inconsistencies in earnings quality related to accrual accounting over the years, with a notable anomaly in 2022.
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