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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Kinder Morgan Inc. pages available for free this week:
- Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Long-term (Investment) Activity Ratios
- Present Value of Free Cash Flow to Equity (FCFE)
- Selected Financial Data since 2010
- Operating Profit Margin since 2010
- Return on Equity (ROE) since 2010
- Debt to Equity since 2010
- Price to Earnings (P/E) since 2010
- Analysis of Revenues
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
Kinder Morgan Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Restricted deposits | ||||||
| Less: Marketable securities at fair value | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current portion of 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 | ||||||
| Chevron Corp. | ||||||
| ConocoPhillips | ||||||
| Exxon Mobil Corp. | ||||||
| Occidental Petroleum Corp. | ||||||
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= – =
3 2019 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 declining trend over the observed period. Starting at 74,065 million US dollars at the end of 2016, the figure decreased to 68,147 million US dollars by the end of 2019. This represents a gradual reduction in the company's net operating asset base, indicating possible divestitures, asset impairments, or an overall strategic shift in asset management.
- Balance-sheet-based Aggregate Accruals
- The balance-sheet-based aggregate accruals fluctuated but generally exhibited less extreme swings over time. In 2016, the accruals were negative at -4,276 million US dollars, followed by a significant reduction in magnitude to -1,424 million in 2017. Subsequently, the accruals swung back to a larger negative value of -3,451 million in 2018, before decreasing again to -1,043 million in 2019. These variations suggest changes in the accrual accounting components, potentially reflecting volatility in earnings quality or adjustments in working capital components.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, followed a pattern consistent with the aggregate accrual values. It started at -5.61% in 2016, improved to -1.94% in 2017, then worsened to -4.87% in 2018, before improving again to -1.52% in 2019. This ratio's fluctuations demonstrate variability in the proportion of accruals relative to net operating assets, reflecting potential changes in earnings quality and management's accounting discretion. The less negative values in 2017 and 2019 suggest periods of improved earnings quality compared to 2016 and 2018.
Cash-Flow-Statement-Based Accruals Ratio
Kinder Morgan Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Kinder Morgan, 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 | ||||||
| Chevron Corp. | ||||||
| ConocoPhillips | ||||||
| Exxon Mobil Corp. | ||||||
| Occidental Petroleum Corp. | ||||||
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 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 value of net operating assets shows a declining trend over the four-year period. Starting at 74,065 million USD in 2016, it slightly decreased to 72,641 million USD in 2017, followed by a more pronounced decrease to 69,190 million USD in 2018, and further to 68,147 million USD in 2019. This continuous reduction indicates a gradual contraction in the operating asset base.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals exhibited considerable fluctuations but remained negative throughout the period. In 2016, the value was -2,374 million USD, which improved to -1,056 million USD in 2017, suggesting a reduction in accruals. However, in 2018, there was a substantial increase in the negative accruals to -3,366 million USD, representing a significant deterioration. This trend reversed somewhat in 2019, with the value improving again to -844 million USD. These variations indicate instability in accrual accounting adjustments relative to cash flows.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, expressed as a percentage, followed a pattern similar to aggregate accruals. It started at -3.12% in 2016, improved to -1.44% in 2017, then significantly worsened to -4.75% in 2018 before improving once more to -1.23% in 2019. The fluctuation in this ratio further reflects the volatility in accrual quality relative to cash flows. The negative values consistently indicate that accruals reduce reported cash flow, and the sharp increase in negative ratio in 2018 raises concerns about the quality of earnings in that year.