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
Express Scripts Holding Co., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 54,255,800) | 51,744,900) | 53,243,300) | 53,798,900) | 53,548,200) | |
| Less: Cash and cash equivalents | 2,309,600) | 3,077,200) | 3,186,300) | 1,832,600) | 1,991,400) | |
| Operating assets | 51,946,200) | 48,667,700) | 50,057,000) | 51,966,300) | 51,556,800) | |
| Operating Liabilities | ||||||
| Total liabilities | 36,130,500) | 35,501,100) | 35,862,800) | 33,734,900) | 31,703,400) | |
| Less: Short-term debt and current maturities of long-term debt | 1,032,900) | 722,300) | 1,646,400) | 2,555,300) | 1,584,000) | |
| Less: Long-term debt, excluding current maturities | 14,981,500) | 14,846,000) | 13,946,300) | 11,012,700) | 12,363,000) | |
| Operating liabilities | 20,116,100) | 19,932,800) | 20,270,100) | 20,166,900) | 17,756,400) | |
| Net operating assets1 | 31,830,100) | 28,734,900) | 29,786,900) | 31,799,400) | 33,800,400) | |
| Balance-sheet-based aggregate accruals2 | 3,095,200) | (1,052,000) | (2,012,500) | (2,001,000) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 10.22% | -3.60% | -6.54% | -6.10% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Abbott Laboratories | — | — | — | — | — | |
| CVS Health Corp. | — | — | — | — | — | |
| Elevance Health Inc. | — | — | — | — | — | |
| Intuitive Surgical Inc. | — | — | — | — | — | |
| Medtronic PLC | — | — | — | — | — | |
| UnitedHealth Group Inc. | — | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2013-12-31).
1 2017 Calculation
Net operating assets = Operating assets – Operating liabilities
= 51,946,200 – 20,116,100 = 31,830,100
2 2017 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2017 – Net operating assets2016
= 31,830,100 – 28,734,900 = 3,095,200
3 2017 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 3,095,200 ÷ [(31,830,100 + 28,734,900) ÷ 2] = 10.22%
4 Click competitor name to see calculations.
The data reveals notable fluctuations in net operating assets and accrual measures over the four-year period.
- Net Operating Assets
- Net operating assets displayed a declining trend from the end of 2014 through the end of 2016, decreasing from approximately 31.8 billion USD to 28.7 billion USD. However, in 2017, this trend reversed with a significant increase back to approximately 31.8 billion USD, nearly matching the 2014 level.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals were negative from 2014 to 2016, indicating that accruals reduced the reported earnings during those years. The highest negative accrual was recorded in 2015 (-2.01 billion USD). In 2017, there was a pronounced shift with aggregate accruals turning positive (3.10 billion USD), reflecting a substantial increase compared to previous years.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, which expresses aggregate accruals as a percentage of net operating assets, followed a similar pattern. It was negative and decreasing through 2015 (-6.54%), then improved partially in 2016 (-3.6%), and ultimately reversed to a markedly positive figure in 2017 (10.22%). This positive ratio suggests that accruals formed a notable proportion of net operating assets in 2017, a significant change from prior years.
Overall, the data indicates a period of contraction in net operating assets and substantial negative accrual activity from 2014 to 2016, which subsequently shifted in 2017 to growth in net operating assets and a pronounced positive accrual presence. This reversal could imply changes in operational performance or accounting practices affecting the quality of reported earnings in that year.
Cash-Flow-Statement-Based Accruals Ratio
Express Scripts Holding Co., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Express Scripts | 4,517,400) | 3,404,400) | 2,476,400) | 2,007,600) | 1,844,600) | |
| Less: Net cash flows provided by operating activities | 5,351,300) | 4,919,400) | 4,848,300) | 4,549,000) | 4,768,900) | |
| Less: Net cash used in investing activities | (3,690,600) | (351,900) | (268,500) | (411,900) | (70,000) | |
| Cash-flow-statement-based aggregate accruals | 2,856,700) | (1,163,100) | (2,103,400) | (2,129,500) | (2,854,300) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 9.43% | -3.97% | -6.83% | -6.49% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Abbott Laboratories | — | — | — | — | — | |
| CVS Health Corp. | — | — | — | — | — | |
| Elevance Health Inc. | — | — | — | — | — | |
| Intuitive Surgical Inc. | — | — | — | — | — | |
| Medtronic PLC | — | — | — | — | — | |
| UnitedHealth Group Inc. | — | — | — | — | — | |
Based on: 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), 10-K (reporting date: 2013-12-31).
1 2017 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,856,700 ÷ [(31,830,100 + 28,734,900) ÷ 2] = 9.43%
2 Click competitor name to see calculations.
The data reveals notable changes in the financial metrics of the entity over the four-year period ending December 31, 2017.
- Net Operating Assets
- The net operating assets exhibited a fluctuating trend. Beginning at approximately 31.8 billion US dollars at the end of 2014, the figure declined consistently over the next two years to about 29.8 billion in 2015 and further down to approximately 28.7 billion in 2016. However, this downward trend reversed in 2017, with a marked increase back to approximately 31.8 billion, effectively returning to the 2014 level. This pattern suggests a period of asset contraction followed by a recovery or expansion phase in the operating asset base.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals, expressed in thousands of US dollars, demonstrate a significant shift over the four years. Initially, the accruals were negative, indicating potential reductions in accrued liabilities or increases in accrued assets. Specifically, the values were about -2.13 billion in 2014 and slightly improved to approximately -2.10 billion in 2015. The negative accruals notably decreased to around -1.16 billion in 2016, representing a reduction in the magnitude of accruals. In 2017, the trend reversed dramatically, exhibiting positive accruals of approximately 2.86 billion. This reversal from negative to positive accruals could indicate a change in accounting policies, operational performance, or cash flow timing differences.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, mirrors the trend in aggregate accruals. The ratio was negative across the first three years, beginning at -6.49% in 2014 and slightly declining to -6.83% in 2015, followed by a reduction in negative value to -3.97% in 2016. A significant change occurred in 2017 when the ratio turned positive, reaching 9.43%. This shift from a negative to a positive ratio suggests an alteration in the quality of earnings, possibly reflecting increased accruals relative to operating assets, which may warrant further investigation into earnings management or operational changes.
In summary, the financial data reveals a period of contraction in net operating assets followed by recovery, alongside a notable transition in accruals from negative to positive values. The accruals ratio's reversal from negative to positive signals a potential change in accrual accounting or operational dynamics, which may impact the interpretation of earnings quality during the observed years.