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
Cytokinetics Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 1,014,775) | 841,319) | 533,803) | 289,814) | 211,178) | |
| Less: Cash and cash equivalents | 65,582) | 112,666) | 82,985) | 36,433) | 42,256) | |
| Less: Short-term investments | 716,995) | 358,972) | 381,075) | 188,679) | 156,475) | |
| Operating assets | 232,198) | 369,681) | 69,743) | 64,702) | 12,447) | |
| Operating Liabilities | ||||||
| Total liabilities | 1,122,675) | 597,456) | 420,420) | 300,751) | 185,244) | |
| Less: Current portion of term loan | —) | —) | —) | —) | 2,607) | |
| Less: Short-term finance lease liabilities | 1,000) | 500) | —) | —) | —) | |
| Less: Term loan, net, excluding current portion | 63,810) | 47,367) | 46,209) | 45,052) | 39,806) | |
| Less: Convertible notes, net | 545,808) | 95,471) | 89,504) | 84,205) | —) | |
| Less: Long-term finance lease liabilities | 1,001) | 805) | —) | —) | —) | |
| Operating liabilities | 511,056) | 453,313) | 284,707) | 171,494) | 142,831) | |
| Net operating assets1 | (278,858) | (83,632) | (214,964) | (106,792) | (130,384) | |
| Balance-sheet-based aggregate accruals2 | (195,226) | 131,332) | (108,172) | 23,592) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | — | — | — | — | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| AbbVie Inc. | -14.27% | — | — | — | — | |
| Amgen Inc. | 4.07% | — | — | — | — | |
| Bristol-Myers Squibb Co. | -3.86% | — | — | — | — | |
| Danaher Corp. | -1.55% | — | — | — | — | |
| Eli Lilly & Co. | 11.56% | — | — | — | — | |
| Gilead Sciences Inc. | -2.92% | — | — | — | — | |
| Johnson & Johnson | 19.84% | — | — | — | — | |
| Merck & Co. Inc. | 0.46% | — | — | — | — | |
| Pfizer Inc. | 24.95% | — | — | — | — | |
| Regeneron Pharmaceuticals Inc. | 11.07% | — | — | — | — | |
| Thermo Fisher Scientific Inc. | -1.78% | — | — | — | — | |
| Vertex Pharmaceuticals Inc. | 14.07% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 4.85% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 5.30% | 200.00% | — | — | — | |
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
= 232,198 – 511,056 = -278,858
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= -278,858 – -83,632 = -195,226
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -195,226 ÷ [(-278,858 + -83,632) ÷ 2] = —
4 Click competitor name to see calculations.
The financial data reveals notable fluctuations over the reported periods, indicating varying operational and accounting dynamics.
- Net Operating Assets
- The net operating assets show a negative value throughout all the years presented, indicating that liabilities exceed operating assets persistently. There is a sharp decline from -106,792 thousand US dollars in 2019 to -214,964 thousand US dollars in 2020, suggesting an increased deficit or a higher level of obligations relative to operating assets. In 2021, this figure improves significantly to -83,632 thousand US dollars, reflecting a reduction in the negative net operating assets by nearly 131,000 thousand US dollars compared to 2020. However, in 2022, the net operating assets worsen considerably, reaching -278,858 thousand US dollars, marking the lowest position in the four years and representing a significant increase in net liabilities or reduction in operating assets.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals indicate considerable variability over the timeline. In 2019, the accruals are positive at 23,592 thousand US dollars, implying accruals contributing positively to operational accounting measures. In 2020, there is a substantial negative swing to -108,172 thousand US dollars, which could reflect unusual or accelerated expense recognition or other accrual-related adjustments. The following year, 2021, accruals again swing sharply to a positive 131,332 thousand US dollars, indicating a reversal or new accrual events that substantially affect the earnings quality. In 2022, accruals sharply reverse direction once again to -195,226 thousand US dollars, the largest negative value recorded in the period, suggesting increased earnings management risk or volatility in non-cash adjustments.
- Balance-Sheet-Based Accruals Ratio
- No data is available for the accruals ratio, limiting direct analysis of accruals relative to total assets or operating components. However, the observed volatility in aggregate accruals combined with markedly negative net operating assets points to challenges in earnings quality and potential risks in sustainable earnings recognition.
In conclusion, the trends indicate pronounced fluctuations in accrual accounting and operating asset management, with significant swings in accrued amounts and worsening net operating assets in the most recent period. These patterns may point to instability in financial performance quality and potential earnings management concerns that warrant further scrutiny.
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Cash-Flow-Statement-Based Accruals Ratio
Cytokinetics Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net loss | (388,955) | (215,314) | (127,290) | (121,692) | (106,289) | |
| Less: Net cash provided by (used in) operating activities | (299,516) | (142,522) | 8,943) | (90,907) | (101,215) | |
| Less: Net cash (used in) provided by investing activities | (262,134) | (147,777) | (196,515) | (74,707) | 5,133) | |
| Cash-flow-statement-based aggregate accruals | 172,695) | 74,985) | 60,282) | 43,922) | (10,207) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | — | — | — | — | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| AbbVie Inc. | -16.25% | — | — | — | — | |
| Amgen Inc. | 8.81% | — | — | — | — | |
| Bristol-Myers Squibb Co. | -9.10% | — | — | — | — | |
| Danaher Corp. | 1.44% | — | — | — | — | |
| Eli Lilly & Co. | 10.27% | — | — | — | — | |
| Gilead Sciences Inc. | -4.95% | — | — | — | — | |
| Johnson & Johnson | 10.78% | — | — | — | — | |
| Merck & Co. Inc. | 0.61% | — | — | — | — | |
| Pfizer Inc. | 18.46% | — | — | — | — | |
| Regeneron Pharmaceuticals Inc. | 18.61% | — | — | — | — | |
| Thermo Fisher Scientific Inc. | -0.06% | — | — | — | — | |
| Vertex Pharmaceuticals Inc. | -14.45% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 2.52% | 15.89% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 4.25% | 14.62% | — | — | — | |
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 × 172,695 ÷ [(-278,858 + -83,632) ÷ 2] = —
2 Click competitor name to see calculations.
The data reveals significant fluctuations in net operating assets and cash-flow-statement-based aggregate accruals over the four-year period examined, ending December 31, 2022.
- Net Operating Assets
- The net operating assets display considerable volatility. In 2019, the figure was negative at approximately -106.8 million USD, indicating liabilities or obligations surpassing operating assets. This negative trend intensified in 2020, reaching nearly -215.0 million USD, nearly doubling the previous year's deficit. However, in 2021, net operating assets improved substantially to about -83.6 million USD, marking a significant reduction in the negative balance. Despite this improvement, 2022 reflected a sharp reversal as the value plunged again to approximately -278.9 million USD, the lowest point in the four-year span. Overall, the trend suggests episodic shifts with a concerning large negative balance in the final year, which may indicate increasing operational liabilities or reduced operational asset base.
- Cash-flow-statement-based Aggregate Accruals
- This financial metric showed a continuous upward trajectory during the period analyzed. In 2019, accruals measured approximately 43.9 million USD, followed by a rise to about 60.3 million USD in 2020. The growth persisted in 2021, with accruals climbing to nearly 75.0 million USD. The most dramatic increase occurred in 2022, with accruals more than doubling the previous year's figure to approximately 172.7 million USD. This steady growth, culminating in a sharp rise at the end of the period, may suggest increasing differences between earnings and cash flow, pointing to potential recognition timing issues or higher non-cash adjustments.
- Cash-flow-statement-based Accruals Ratio
- Values for the accruals ratio were not provided in the data, resulting in an absence of analysis for this particular metric.
In summary, the company experienced significant variability in net operating assets with a final sharp increase in negative values in 2022, while cash-flow-statement-based accruals grew consistently, especially markedly in the last year reported. These patterns might highlight areas requiring management attention regarding operational efficiency, asset management, and the reliability of earnings vis-à-vis cash flows.
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