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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Illumina Inc. pages available for free this week:
- Common-Size Income Statement
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Profitability Ratios
- Analysis of Long-term (Investment) Activity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Enterprise Value to EBITDA (EV/EBITDA)
- Price to FCFE (P/FCFE)
- Operating Profit Margin since 2005
- Return on Assets (ROA) since 2005
- Total Asset Turnover since 2005
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Balance-Sheet-Based Accruals Ratio
Illumina Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2020 | Dec 29, 2019 | Dec 30, 2018 | Dec 31, 2017 | Dec 31, 2016 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Short-term investments | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Build-to-suit lease liability | ||||||
| Less: Long-term debt, current portion | ||||||
| Less: Long-term debt, 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. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | ||||||
Based on: 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-29), 10-K (reporting date: 2018-12-30), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31).
1 2020 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2020 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2020 – Net operating assets2019
= – =
3 2020 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 exhibited a generally increasing trend over the four-year period. Starting at 2,160 million US dollars at the end of 2017, the figure rose to 2,391 million in 2018, experienced a slight decline to 2,340 million in 2019, and then increased again to 2,406 million by the end of 2020. Overall, the net operating assets demonstrated moderate growth with a small dip observed in 2019.
- Balance-sheet-based Aggregate Accruals
- The balance-sheet-based aggregate accruals showed considerable volatility during the period under review. The value increased significantly from 133 million US dollars in 2017 to 231 million in 2018, indicating a substantial rise in accruals. This was followed by a notable reversal in 2019, where the accruals turned negative, reaching -51 million. In 2020, the value returned to a positive figure of 66 million, reflecting some recovery but at a much lower level compared to 2017 and 2018.
- Balance-sheet-based Accruals Ratio
- The accruals ratio mirrored the pattern observed in aggregate accruals, showing marked fluctuations. It increased sharply from 6.34% in 2017 to 10.15% in 2018, indicating a higher proportion of accruals relative to net operating assets. This ratio then dropped substantially to -2.16% in 2019, consistent with the negative aggregate accruals for that year. In 2020, the ratio partially recovered to 2.78%, remaining positive but below the levels recorded in 2017 and 2018.
Cash-Flow-Statement-Based Accruals Ratio
Illumina Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2020 | Dec 29, 2019 | Dec 30, 2018 | Dec 31, 2017 | Dec 31, 2016 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Illumina stockholders | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash (used in) provided by 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. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | ||||||
Based on: 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-29), 10-K (reporting date: 2018-12-30), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31).
1 2020 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
- The net operating assets exhibited a generally stable trend over the observed periods. Starting at 2,160 million US dollars in 2017, they increased steadily to 2,391 million in 2018, followed by a slight decrease to 2,340 million in 2019. The figure rose again in 2020 to 2,406 million US dollars, indicating overall moderate growth with minor fluctuations.
- Cash-Flow-Statement-Based Aggregate Accruals
- There is significant volatility in the aggregate accruals across the years. In 2017, accruals were positive at 65 million US dollars, surging sharply to 1,497 million in 2018, which indicates a considerable increase in non-cash working capital components or other accruals. This was followed by a large negative accrual figure of -794 million in 2019, suggesting a reversal or significant reduction in accruals. In 2020, the figure returned to a positive 130 million US dollars, reflecting a stabilization compared to the previous two years but remaining substantially elevated relative to 2017.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio shows pronounced volatility consistent with the aggregate accruals. Beginning at a low 3.1% in 2017, the ratio increased dramatically to 65.79% in 2018. This sharp increase signifies a substantial deviation in accruals relative to net operating assets. In 2019, the ratio reversed to a negative -33.57%, indicating a large reduction in accruals relative to assets. By 2020, the ratio moderated to a positive 5.48%, suggesting a return toward a more typical accrual level.
- Overall Observations
- The data reveal notable fluctuations in accrual measures over the four-year period, while net operating assets remained relatively consistent with slight growth. The extreme variation in the accrual figures and their ratio suggests potential changes in earnings quality and accounting practices, which may warrant further investigation to understand the underlying causes. The stabilization in 2020 could indicate an adjustment or normalization after the pronounced changes experienced in earlier years.