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: Liabilities and Stockholders’ Equity
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Solvency Ratios
- Analysis of Reportable Segments
- Common Stock Valuation Ratios
- Price to FCFE (P/FCFE)
- Selected Financial Data since 2005
- Net Profit Margin since 2005
- Operating Profit Margin since 2005
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
Marathon Oil Corp., balance sheet computation of aggregate accruals
US$ in millions
| 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: Current portion of long-term finance lease liability | ||||||
| Less: Long-term debt due within one year | ||||||
| Less: Long-term debt, excluding due within one year | ||||||
| Less: Long-term finance lease liability, 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. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Energy | ||||||
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 decreased consistently from 16,165 million US dollars at the end of 2018 to 14,150 million US dollars by the end of 2021. This represents a gradual decline in net operating assets over the four-year period.
- Balance-sheet-based Aggregate Accruals
- The balance-sheet-based aggregate accruals displayed significant volatility during the period analyzed. In 2018, the accruals were negative at -474 million US dollars, indicating a reduction in accrued liabilities or an increase in accrued assets. However, in 2019, this figure sharply increased to a positive 631 million US dollars, suggesting a reversal or build-up of accruals. In 2020 and 2021, the accruals returned to negative values, with -1,573 million US dollars and -1,073 million US dollars respectively, indicating a substantial decrease in accruals or potential write-offs over these years.
- Balance-sheet-based Accruals Ratio
- The accruals ratio followed the pattern observed in aggregate accruals, exhibiting volatility and substantial shifts in sign and magnitude. It started at -2.89% in 2018, shifted to a positive 3.83% in 2019, then dropped sharply to -9.83% in 2020, and slightly recovered to -7.31% in 2021. The negative values in 2018, 2020, and 2021 suggest periods of conservative earnings management or possible downward adjustments to earnings through accruals. The positive value in 2019 stands out as an anomaly in the trend, indicating a different accrual behavior during that year.
- Overall Observations
- Over the four-year span, the company experienced a decline in net operating assets alongside considerable fluctuations in accruals measures. The variability and shifts in the balance-sheet-based accruals and its ratio may signal changes in earnings quality and management's accounting choices. In particular, the sharp swings into significant negative accruals and the large negative ratios in 2020 and 2021 could highlight more conservative financial reporting or adjustments to accrued items during these years, potentially impacting the assessment of earnings persistence and financial stability.
Cash-Flow-Statement-Based Accruals Ratio
Marathon Oil Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income (loss) | ||||||
| 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. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Oil, Gas & Consumable Fuels | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Energy | ||||||
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 displayed a decreasing trend over the observed period. Beginning at 16,165 million USD at the end of 2018, the figure increased slightly to 16,796 million USD by the end of 2019. However, subsequent years showed a decline, with values falling to 15,223 million USD at the end of 2020 and further decreasing to 14,150 million USD by the end of 2021. This overall reduction suggests a contraction in operating assets over time.
- Cash-flow-Statement-Based Aggregate Accruals
- This metric demonstrated significant volatility. In 2018, aggregate accruals were negative at -668 million USD, indicating higher cash flows relative to net income components. In 2019, the accruals reversed to a positive 549 million USD, suggesting changes in working capital or non-cash income components. The years 2020 and 2021 saw a reversion to negative values, -1,621 million USD and -1,283 million USD respectively, showing a marked increase in the magnitude of negative accruals. This variability reflects fluctuations in accrual components impacting cash flows.
- Cash-flow-Statement-Based Accruals Ratio
- The accruals ratio exhibited a parallel pattern to the aggregate accruals, with values moving from negative to positive and back to negative territory. Initially, the ratio stood at -4.07% at the end of 2018, suggesting negative accruals relative to net operating assets. It then shifted to a positive 3.33% at the end of 2019, before declining sharply to -10.13% in 2020 and slightly improving to -8.74% in 2021. These fluctuations indicate changes in the quality of earnings, with large negative ratios in 2020 and 2021 potentially signalling lower earnings quality due to higher negative accruals relative to operating assets.