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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- Income Statement
- Balance Sheet: Assets
- Common-Size Balance Sheet: Assets
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Common Stock Valuation Ratios
- Price to FCFE (P/FCFE)
- Selected Financial Data since 2014
- Operating Profit Margin since 2014
- Debt to Equity since 2014
- Price to Sales (P/S) since 2014
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Balance-Sheet-Based Accruals Ratio
Paycom Software Inc., balance sheet computation of aggregate accruals
US$ in thousands
Based on: 10-K (reporting date: 2022-12-31), 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).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= – =
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
- Net operating assets
- The net operating assets of the company show a consistent upward trend over the four-year period. Starting at 425,594 thousand US dollars at the end of 2019, this figure increased to 534,827 thousand in 2020, 644,891 thousand in 2021, and reached 810,877 thousand by the end of 2022. This steady growth indicates an expansion in the company’s operating asset base, potentially reflecting business growth or increased investments in operations.
- Balance-sheet-based aggregate accruals
- Aggregate accruals also increased over the period, rising from 102,170 thousand US dollars in 2019 to 109,233 thousand in 2020, then to 110,064 thousand in 2021. A more substantial increase occurred in 2022 where the accruals rose sharply to 165,986 thousand. This notable rise in the final year suggests an acceleration in non-cash based earnings components or changes in working capital management and may warrant further examination to understand its drivers.
- Balance-sheet-based accruals ratio
- The accruals ratio, expressed as a percentage of net operating assets, declined from 27.28% in 2019 to 22.75% in 2020 and further to 18.66% in 2021, indicating an improving quality of earnings as accruals formed a smaller proportion of operating assets. However, in 2022, the ratio increased again to 22.8%, reversing the previous declining trend. This suggests a relative increase in accruals compared to operating assets that year, which could indicate a potential decrease in the quality of reported earnings or greater volatility in accrual components.
Cash-Flow-Statement-Based Accruals Ratio
Paycom Software Inc., cash flow statement computation of aggregate accruals
US$ in thousands
Based on: 10-K (reporting date: 2022-12-31), 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).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
- Net Operating Assets
- The data shows a consistent upward trend in net operating assets over the four-year period. Starting at approximately 425.6 million US dollars at the end of 2019, the figure rose to about 810.9 million US dollars by the end of 2022. This represents almost a doubling of net operating assets within the timeframe, indicating significant growth in the company's operating asset base year over year.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals exhibited notable volatility across the years. In 2019, accruals were significantly positive at around 175.9 million US dollars, decreasing drastically to roughly 34.1 million US dollars in 2020. The figure rebounded to 134.3 million US dollars in 2021, before turning negative to approximately -60.4 million US dollars in 2022. This fluctuation suggests variability in accruals relative to operating cash flows, possibly reflecting changes in earnings quality or timing differences between cash flows and accounting accruals.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, expressed as a percentage, followed a pattern consistent with the aggregate accruals. It was highest in 2019 at approximately 47%, then sharply declined to around 7% in 2020. In 2021, it increased again to nearly 23%, before dropping below zero to -8.3% in 2022. The negative ratio in the latest year indicates that cash flows exceeded accrual-based earnings, which may imply improved earnings quality or a shift in the timing of revenue and expense recognition.