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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Celgene Corp. pages available for free this week:
- Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Profitability Ratios
- Analysis of Liquidity Ratios
- Operating Profit Margin since 2005
- Return on Equity (ROE) since 2005
- Return on Assets (ROA) since 2005
- Debt to Equity since 2005
- Total Asset Turnover since 2005
- Price to Earnings (P/E) since 2005
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
Celgene Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Debt securities available-for-sale | ||||||
| Less: Equity investments with readily determinable fair values | ||||||
| Less: Marketable securities available-for-sale | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term borrowings and current portion of long-term debt | ||||||
| Less: Long-term debt, net of discount, 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 | ||||||
| AbbVie Inc. | ||||||
| Amgen Inc. | ||||||
| Bristol-Myers Squibb Co. | ||||||
| Danaher Corp. | ||||||
| Eli Lilly & Co. | ||||||
| Gilead Sciences Inc. | ||||||
| Johnson & Johnson | ||||||
| Merck & Co. Inc. | ||||||
| Pfizer Inc. | ||||||
| Regeneron Pharmaceuticals Inc. | ||||||
| Thermo Fisher Scientific Inc. | ||||||
| Vertex Pharmaceuticals Inc. | ||||||
Based on: 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31).
1 2018 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2018 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2018 – Net operating assets2017
= – =
3 2018 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 from 13,618 million US dollars in 2015 to 10,717 million US dollars in 2017, reflecting a declining trend over this three-year period. However, there was a significant increase in 2018, with net operating assets rising sharply to 20,389 million US dollars, which represents a substantial reversal after the earlier decline.
- Balance-sheet-based aggregate accruals
- Aggregate accruals showed considerable volatility during the period under review. In 2015, the figure was positive at 7,768 million US dollars, indicating strong accruals. This turned negative in 2016 and 2017, with values of -699 million and -2,202 million US dollars respectively, suggesting a decline in accruals or possibly higher cash generation relative to accounting profits. In 2018, the aggregate accruals rebounded significantly to 9,672 million US dollars, marking a notable recovery and even surpassing the 2015 level.
- Balance-sheet-based accruals ratio
- The accruals ratio similarly exhibited high variability. Starting at a high positive level of 79.8% in 2015, it sharply decreased to negative values in 2016 (-5.27%) and 2017 (-18.63%), corresponding with the negative aggregate accruals reported those years. In 2018, the ratio again turned positive to 62.19%, reflecting the substantial increase in aggregate accruals relative to net operating assets observed that year. This trend suggests fluctuations in earnings quality, as accrual components significantly influenced reported earnings, with 2016 and 2017 indicating potentially higher earnings quality or cash flow dominance, whereas 2015 and 2018 show relatively higher accrual influence.
Cash-Flow-Statement-Based Accruals Ratio
Celgene Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | ||
|---|---|---|---|---|---|---|
| Net income | ||||||
| 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 | ||||||
| AbbVie Inc. | ||||||
| Amgen Inc. | ||||||
| Bristol-Myers Squibb Co. | ||||||
| Danaher Corp. | ||||||
| Eli Lilly & Co. | ||||||
| Gilead Sciences Inc. | ||||||
| Johnson & Johnson | ||||||
| Merck & Co. Inc. | ||||||
| Pfizer Inc. | ||||||
| Regeneron Pharmaceuticals Inc. | ||||||
| Thermo Fisher Scientific Inc. | ||||||
| Vertex Pharmaceuticals Inc. | ||||||
Based on: 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31).
1 2018 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
- Over the period from December 31, 2015, to December 31, 2018, net operating assets experienced a fluctuating trend. Starting at 13,618 million USD in 2015, there was a decrease to 12,919 million USD in 2016, followed by a further decline to 10,717 million USD in 2017. However, a significant increase occurred in 2018, with net operating assets rising sharply to 20,389 million USD, representing the highest value in the observed period.
- Cash-Flow-Statement-Based Aggregate Accruals
- This measure showed notable volatility during the analyzed timeframe. In 2015, aggregate accruals stood at 5,377 million USD, which sharply declined to a negative 975 million USD in 2016, indicating a reversal or reduction in accruals. The figure then recovered slightly in 2017 to 585 million USD and increased considerably in 2018 to 5,293 million USD. The pattern suggests intermittent shifts in the accruals reported on the cash flow statement, with two peaks in 2015 and 2018.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, mirrored the fluctuations seen in aggregate accruals. It started at a relatively high level of 55.24% in 2015, dropped drastically to -7.35% in 2016, reflecting a negative accruals position in relation to net operating assets. The ratio then moved into positive but low territory at 4.95% in 2017, before increasing substantially again to 34.03% in 2018. These changes indicate variability in the proportion of accruals relative to net operating assets, with significant shifts between positive and negative or low percentages.