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 | — | — | — | — | — | |
| 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.
Between 2014 and 2017, a significant transition occurred in the company's financial reporting quality as measured by balance-sheet-based accruals. The period began with consistently negative aggregate accruals, suggesting a phase where cash flow exceeded accounting earnings, but concluded with a sharp reversal toward positive accruals.
- Aggregate Accruals Trend
- Aggregate accruals remained stable and negative during 2014 and 2015, holding at approximately -2 billion USD. A trend toward zero began in 2016, with accruals rising to -1.052 billion USD, followed by a substantial shift in 2017, where the figure became positive, reaching 3.095 billion USD.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio mirrored the aggregate trend, moving from -6.10% in 2014 to a low of -6.54% in 2015. A gradual increase followed in 2016 to -3.60%, culminating in a sharp pivot to 10.22% by the end of 2017. This transition from negative to positive territory indicates a fundamental change in the relationship between reported earnings and cash flow, as positive accruals typically suggest that earnings are exceeding cash flows.
- Net Operating Assets Analysis
- Net operating assets exhibited a U-shaped trajectory, declining from 31.799 billion USD in 2014 to 28.735 billion USD in 2016, before returning to 31.830 billion USD in 2017. The sudden increase in the accruals ratio in 2017 coincides with the recovery and expansion of net operating assets, indicating that the rise in accruals is linked to the growth of the balance sheet's operating components during that fiscal year.
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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 | — | — | — | — | — | |
| 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 analysis of reporting quality from 2014 to 2017 reveals a significant shift in the relationship between accrual-based earnings and cash flow. For the majority of the period, the company maintained negative accruals, suggesting that cash flow from operations exceeded reported accounting earnings. However, a sharp reversal occurred in the final year of the sequence.
- Net Operating Assets
- Net operating assets exhibited a slight downward trend between 2014 and 2016, decreasing from 31,799,400 thousand US dollars to 28,734,900 thousand US dollars. This trend reversed in 2017, with assets returning to 31,830,100 thousand US dollars, effectively returning to 2014 levels.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals remained consistently negative from 2014 through 2016, holding steady at approximately negative 2.1 billion US dollars in 2014 and 2015 before improving to negative 1,163,100 thousand US dollars in 2016. In 2017, a substantial pivot occurred, as accruals shifted to a positive 2,856,700 thousand US dollars.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrors the trend of aggregate accruals, reflecting a transition in earnings quality. The ratio remained negative and relatively stable between -6.49% in 2014 and -6.83% in 2015, followed by a moderate increase to -3.97% in 2016. The 2017 fiscal year marked a significant departure from previous patterns, with the ratio rising to a positive 9.43%. This shift indicates that by 2017, reported earnings were supported by fewer cash flows relative to the asset base than in previous years.
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