Accrual Quality
factor.formula
Accruals:
in:
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Change in Current Assets: refers to the net increase in a company's current assets during the reporting period. Current assets include cash, accounts receivable, inventory, etc.
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Change in Cash and Cash Equivalents: refers to the net increase in the company's cash and cash equivalents during the reporting period, including bank deposits, cash on hand and investments that can be quickly converted into cash in the short term.
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Change in Current Liabilities: refers to the net increase in a company's current liabilities during the reporting period. Current liabilities include accounts payable, notes payable, short-term loans, etc.
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Change in Short-Term Debt: refers to the net increase in the company's short-term loans during the reporting period. This item is part of current liabilities and needs to be extracted separately.
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Change in Taxes Payable: refers to the net increase in taxes payable by the company during the reporting period. This item is part of current liabilities and needs to be extracted separately.
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Depreciation and Amortization: refers to the total depreciation and amortization expenses during the reporting period. Depreciation is the allocation of the loss of value of fixed assets; amortization is the allocation of the loss of value of intangible assets.
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Average Total Assets: refers to the average of the total assets at the beginning and end of the reporting period. It is used to normalize accruals and eliminate the impact of differences in company size. The calculation formula is (beginning total assets + ending total assets) / 2.
factor.explanation
This factor measures the quality of a company's earnings by calculating the company's total accruals from balance sheet information. Accruals are the non-cash portion of accounting earnings, as opposed to cash flows. If a company's earnings are primarily composed of accruals and its cash flows are low, its earnings quality is low. This indicates that the company may be engaging in earnings management, such as artificially adjusting accruals to affect current profits. Lower accrual quality is often associated with lower earnings persistence, meaning that current profits may not be an effective predictor of future profits. Because investors may not fully recognize or anticipate this lower persistence, it leads to mispricing of security prices. Therefore, the accrual quality factor can be viewed as a measure of a company's earnings quality and potential risk. High accrual quality is often viewed as more favorable, reflecting the robustness of a company's earnings, while low accrual quality may mean potential risk to a company's financial condition.