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 significant volatility in balance-sheet-based aggregate accruals and a consistent negative position in net operating assets from 2019 through 2022.
- Net Operating Assets
- Net operating assets remained negative throughout the analyzed period, indicating that operating liabilities consistently exceeded operating assets. The balance exhibited fluctuation, moving from negative 106.8 million US dollars in 2019 to negative 215.0 million US dollars in 2020, recovering partially to negative 83.6 million US dollars in 2021, before reaching its lowest point of negative 278.9 million US dollars in 2022.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals demonstrated extreme instability, characterized by alternating positive and negative values over the four-year span. The figures shifted from 23.6 million US dollars in 2019 to negative 108.2 million US dollars in 2020, rebounded to 131.3 million US dollars in 2021, and declined sharply to negative 195.2 million US dollars by the end of 2022.
- Reporting Quality and Trend Analysis
- The alternating signs and increasing magnitude of aggregate accruals suggest significant variance between accrual-based accounting and actual cash flows. The widening swings in accruals, paired with a deepening negative net operating asset position in 2022, indicate a highly volatile relationship between the balance sheet and the income statement, which typically complicates the assessment of earnings persistence and reporting quality.
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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.
An analysis of the financial reporting quality reveals a consistent upward trajectory in cash-flow-statement-based aggregate accruals from 2019 through 2022. During this same period, net operating assets remained consistently negative, characterized by significant fluctuations in magnitude.
- Cash-flow-statement-based Aggregate Accruals
- A steady increase in aggregate accruals is observed, rising from $43.9 million in 2019 to $75.0 million in 2021. This trend accelerated sharply in 2022, with accruals reaching $172.7 million, representing a more than fourfold increase from the 2019 baseline.
- Net Operating Assets (NOA)
- Net operating assets maintained a negative balance across all reported years. The figures transitioned from -$106.8 million in 2019 to -$215.0 million in 2020, recovered partially to -$83.6 million in 2021, and subsequently declined to a period low of -$278.9 million by the end of 2022.
- Accruals Ratio Trends
- The interaction between positive aggregate accruals and negative net operating assets results in a negative accruals ratio. This ratio demonstrated volatility, moving from approximately -41.1% in 2019 to -28.0% in 2020, dropping sharply to -89.7% in 2021, and settling at -61.9% in 2022. The widening gap between accruals and net operating assets suggests an increasing divergence between cash flows and accounting-based earnings.
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