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.
Balance-Sheet-Based Accruals Ratio
Abiomed Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Mar 31, 2022 | Mar 31, 2021 | Mar 31, 2020 | Mar 31, 2019 | Mar 31, 2018 | Mar 31, 2017 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 1,673,393) | 1,494,359) | 1,216,462) | 1,054,346) | 786,375) | 550,414) | |
| Less: Cash and cash equivalents | 132,818) | 232,710) | 192,341) | 121,021) | 42,975) | 39,040) | |
| Less: Short-term marketable securities | 625,789) | 350,985) | 250,775) | 370,677) | 319,274) | 190,908) | |
| Operating assets | 914,786) | 910,664) | 773,346) | 562,648) | 424,126) | 320,466) | |
| Operating Liabilities | |||||||
| Total liabilities | 170,067) | 164,684) | 150,996) | 117,456) | 96,851) | 98,343) | |
| Less: Current portion of capital lease obligation | —) | —) | —) | —) | —) | 799) | |
| Less: Capital lease obligation, net of current portion | —) | —) | —) | —) | —) | 15,539) | |
| Operating liabilities | 170,067) | 164,684) | 150,996) | 117,456) | 96,851) | 82,005) | |
| Net operating assets1 | 744,719) | 745,980) | 622,350) | 445,192) | 327,275) | 238,461) | |
| Balance-sheet-based aggregate accruals2 | (1,261) | 123,630) | 177,158) | 117,917) | 88,814) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | -0.17% | 18.07% | 33.19% | 30.53% | 31.40% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Abbott Laboratories | -0.73% | — | — | — | — | — | |
| Elevance Health Inc. | 0.32% | — | — | — | — | — | |
| Intuitive Surgical Inc. | -10.21% | — | — | — | — | — | |
| Medtronic PLC | -1.37% | — | — | — | — | — | |
| UnitedHealth Group Inc. | 17.32% | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Health Care Equipment & Services | 6.46% | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Health Care | 5.30% | 200.00% | — | — | — | — | |
Based on: 10-K (reporting date: 2022-03-31), 10-K (reporting date: 2021-03-31), 10-K (reporting date: 2020-03-31), 10-K (reporting date: 2019-03-31), 10-K (reporting date: 2018-03-31), 10-K (reporting date: 2017-03-31).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 914,786 – 170,067 = 744,719
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 744,719 – 745,980 = -1,261
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,261 ÷ [(744,719 + 745,980) ÷ 2] = -0.17%
4 Click competitor name to see calculations.
The analysis of financial reporting quality indicates a significant shift in the relationship between net operating assets and aggregate accruals over the five-year period ending March 31, 2022. While net operating assets experienced sustained growth for most of the period, the accruals ratio underwent a substantial contraction, moving from a period of relative stability to a near-zero level.
- Net Operating Assets Trend
- Net operating assets demonstrated a consistent upward trajectory from March 31, 2018, to March 31, 2021, rising from US$ 327.3 million to US$ 746.0 million. This growth leveled off in the final year of the period, with assets ending at US$ 744.7 million as of March 31, 2022.
- Aggregate Accruals Evolution
- Balance-sheet-based aggregate accruals increased steadily during the first three years, peaking at US$ 177.2 million in 2020. Following this peak, a sharp decline occurred, with accruals dropping to US$ 123.6 million in 2021 and further contracting to a negative value of US$ 1.3 million by March 31, 2022.
- Accruals Ratio Interpretation
- The balance-sheet-based accruals ratio remained elevated between 30.53% and 33.19% from 2018 through 2020. A significant downward trend emerged in 2021, as the ratio fell to 18.07%, eventually reaching -0.17% in 2022. This progression suggests a transition toward higher earnings quality, as the reliance on accruals decreased and reported earnings became more closely aligned with cash flow.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
How can I help you?
Cash-Flow-Statement-Based Accruals Ratio
Abiomed Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Mar 31, 2022 | Mar 31, 2021 | Mar 31, 2020 | Mar 31, 2019 | Mar 31, 2018 | Mar 31, 2017 | ||
|---|---|---|---|---|---|---|---|
| Net income | 136,505) | 225,525) | 203,009) | 259,016) | 112,170) | 52,116) | |
| Less: Net cash provided by operating activities | 285,390) | 274,578) | 314,920) | 252,197) | 192,546) | 115,116) | |
| Less: Net cash used for investing activities | (380,990) | (223,344) | (125,455) | (116,455) | (180,762) | (126,333) | |
| Cash-flow-statement-based aggregate accruals | 232,105) | 174,291) | 13,544) | 123,274) | 100,386) | 63,333) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 31.14% | 25.47% | 2.54% | 31.92% | 35.49% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Abbott Laboratories | -2.08% | — | — | — | — | — | |
| Elevance Health Inc. | 8.35% | — | — | — | — | — | |
| Intuitive Surgical Inc. | -20.88% | — | — | — | — | — | |
| Medtronic PLC | -0.97% | — | — | — | — | — | |
| UnitedHealth Group Inc. | 21.73% | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Health Care Equipment & Services | 8.70% | 11.34% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Health Care | 4.25% | 14.62% | — | — | — | — | |
Based on: 10-K (reporting date: 2022-03-31), 10-K (reporting date: 2021-03-31), 10-K (reporting date: 2020-03-31), 10-K (reporting date: 2019-03-31), 10-K (reporting date: 2018-03-31), 10-K (reporting date: 2017-03-31).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 232,105 ÷ [(744,719 + 745,980) ÷ 2] = 31.14%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality between March 31, 2018, and March 31, 2022, reveals a general expansion in net operating assets accompanied by significant volatility in aggregate accruals. While net operating assets grew steadily for the majority of the period, the cash-flow-statement-based accruals ratio experienced a sharp contraction in 2020 before returning to elevated levels by the end of the period.
- Net Operating Assets
- A consistent upward trend is observed in net operating assets, which increased from 327,275 thousand USD in 2018 to a peak of 745,980 thousand USD in 2021. This represents a substantial growth in the asset base utilized for operations. A stabilization occurred in 2022, with the value remaining nearly flat at 744,719 thousand USD.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals exhibited high volatility throughout the five-year period. Following an increase between 2018 and 2019, there was a precipitous decline to 13,544 thousand USD in 2020. This was followed by a sharp reversal and rapid growth, with accruals ascending to 174,291 thousand USD in 2021 and reaching 232,105 thousand USD in 2022.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrors the volatility seen in aggregate accruals. Starting at 35.49% in 2018 and 31.92% in 2019, the ratio indicates a significant gap between accrual-based earnings and cash flows. A notable anomaly occurred in 2020, where the ratio dropped to 2.54%, suggesting a period of high earnings quality where reported income was closely aligned with operating cash flows. However, the ratio returned to 25.47% in 2021 and 31.14% in 2022, indicating a return to a pattern where a larger portion of earnings is comprised of non-cash accruals.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
How can I help you?