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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Lockheed Martin Corp. pages available for free this week:
- Balance Sheet: Liabilities and Stockholders’ Equity
- Common-Size Income Statement
- Analysis of Liquidity Ratios
- Analysis of Solvency Ratios
- Analysis of Long-term (Investment) Activity Ratios
- Analysis of Reportable Segments
- Common Stock Valuation Ratios
- Present Value of Free Cash Flow to Equity (FCFE)
- Net Profit Margin since 2005
- Price to Operating Profit (P/OP) since 2005
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Balance-Sheet-Based Accruals Ratio
Lockheed Martin Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current maturities of long-term debt | ||||||
| Less: Long-term debt, net, 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. | ||||||
| RTX Corp. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Capital Goods | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Industrials | ||||||
Based on: 10-K (reporting date: 2025-12-31), 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).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= – =
3 2025 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.
The balance-sheet-based accruals ratio demonstrates a significant declining trend over the observed period. Initially high, the ratio decreased substantially from 2022 to 2025, suggesting a shift in the relationship between net operating assets and aggregate accruals.
- Net Operating Assets
- Net operating assets exhibited a consistent, albeit moderate, increase throughout the period, rising from US$22,266 million in 2022 to US$24,300 million in 2025. This indicates steady growth in the company’s operational investments.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals experienced substantial volatility. A marked decrease is evident from US$3,235 million in 2022 to US$586 million in 2023. Accruals then increased to US$1,268 million in 2024 before declining sharply to US$180 million in 2025. This fluctuation suggests changes in the timing of revenue and expense recognition.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio began at 15.67% in 2022, representing a relatively high level of accruals relative to net operating assets. The ratio fell dramatically to 2.60% in 2023, indicating a substantial reduction in the proportion of accruals. A further decrease to 5.40% in 2024 was followed by a significant drop to 0.74% in 2025. This consistent decline suggests improved earnings quality, potentially reflecting more conservative accounting practices or a more efficient cash conversion cycle. The ratio’s movement towards zero implies a closer alignment between reported earnings and cash flows.
The combined trends suggest that while net operating assets have grown steadily, the company has significantly reduced its reliance on accruals to manage reported earnings. The substantial decrease in the accruals ratio warrants further investigation to understand the underlying drivers of this change and to assess its sustainability.
Cash-Flow-Statement-Based Accruals Ratio
Lockheed Martin Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net earnings | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash used for 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. | ||||||
| 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: 2025-12-31), 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).
1 2025 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 reveals fluctuating patterns in aggregate accruals and the corresponding accruals ratio over the four-year period. Net operating assets demonstrate a consistent, albeit modest, increase annually.
- Cash-Flow-Statement-Based Aggregate Accruals
- Cash-flow-statement-based aggregate accruals exhibited significant volatility. A negative value of -281 million was recorded in 2022, followed by a substantial positive swing to 694 million in 2023. This was tempered by a decrease to 156 million in 2024, before a marked decline to -1,563 million in 2025. The magnitude of the negative accrual in 2025 is considerably larger than the negative accrual in 2022.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrors the trend in aggregate accruals. In 2022, the ratio stood at -1.36%. A considerable increase was observed in 2023, reaching 3.08%. The ratio then decreased to 0.66% in 2024. A substantial negative shift occurred in 2025, with the ratio falling to -6.46%. This represents the largest negative value within the observed period.
- Relationship between Net Operating Assets and Accruals
- While net operating assets increased each year, the accruals ratio demonstrates a lack of consistent correlation. The positive accruals in 2023 and 2024 did not prevent continued growth in net operating assets, and conversely, the negative accruals in 2022 and 2025 occurred alongside increases in net operating assets. This suggests factors beyond asset growth are driving accrual patterns.
The substantial fluctuations in both aggregate accruals and the accruals ratio warrant further investigation. The significant negative accrual and ratio in 2025, in particular, may indicate potential areas of concern regarding earnings quality and should be examined in conjunction with other financial metrics and operational factors.