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
Illumina Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 29, 2019 | Dec 30, 2018 | Dec 31, 2017 | Jan 1, 2017 | Jan 3, 2016 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 7,316 | 6,959 | 5,257 | 4,281 | 3,688 | |
| Less: Cash and cash equivalents | 2,042 | 1,144 | 1,225 | 735 | 769 | |
| Less: Short-term investments | 1,372 | 2,368 | 920 | 824 | 617 | |
| Operating assets | 3,902 | 3,447 | 3,112 | 2,722 | 2,302 | |
| Operating Liabilities | ||||||
| Total liabilities | 2,703 | 3,053 | 2,288 | 1,966 | 1,807 | |
| Less: Build-to-suit lease liability | — | — | 144 | 223 | 9 | |
| Less: Long-term debt, current portion | — | 1,107 | 10 | 1 | 75 | |
| Less: Long-term debt, excluding current portion | 1,141 | 890 | 1,182 | 1,048 | 1,016 | |
| Operating liabilities | 1,562 | 1,056 | 952 | 695 | 707 | |
| Net operating assets1 | 2,340 | 2,391 | 2,160 | 2,027 | 1,595 | |
| Balance-sheet-based aggregate accruals2 | (51) | 231 | 133 | 432 | — | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -2.16% | 10.15% | 6.34% | 23.87% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Abbott Laboratories | -1.97% | -6.71% | 69.42% | -1.06% | — | |
| AbbVie Inc. | -24.37% | -31.42% | -7.02% | 25.20% | — | |
| Amgen Inc. | 56.66% | -9.88% | -33.04% | -6.85% | — | |
| Biogen Inc. | -4.05% | 3.85% | 7.67% | 9.75% | — | |
| Bristol-Myers Squibb Co. | 147.33% | -3.17% | -24.97% | -0.82% | — | |
| Eli Lilly & Co. | -0.10% | -10.27% | -5.99% | 1.26% | — | |
| Gilead Sciences Inc. | 19.80% | -41.29% | -16.94% | 23.56% | — | |
| Johnson & Johnson | -3.85% | -8.03% | 31.51% | 5.55% | — | |
| Merck & Co. Inc. | -2.90% | -15.70% | -0.65% | -12.97% | — | |
| Pfizer Inc. | 19.85% | -9.34% | 12.36% | 4.12% | — | |
| Regeneron Pharmaceuticals Inc. | 25.36% | 20.14% | 33.15% | 26.37% | — | |
| Vertex Pharmaceuticals Inc. | 42.22% | 110.08% | -29.69% | -17.29% | — | |
| Zoetis Inc. | 4.03% | 29.08% | -1.25% | 8.66% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals & Biotechnology | 23.89% | -10.89% | 10.16% | 4.19% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 15.82% | -0.81% | 9.00% | 4.66% | — | |
Based on: 10-K (filing date: 2020-02-11), 10-K (filing date: 2019-02-12), 10-K (filing date: 2018-02-13), 10-K (filing date: 2017-02-14), 10-K (filing date: 2016-03-02).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= 3,902 – 1,562 = 2,340
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= 2,340 – 2,391 = -51
3 2019 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -51 ÷ [(2,340 + 2,391) ÷ 2] = -2.16%
4 Click competitor name to see calculations.
| Financial ratio | Description | The company |
|---|---|---|
| Balance-sheet-based accruals ratio | Ratio is found by dividing balance-sheet-based aggregate accruals by average net operating assets. | Using the balance-sheet-based accruals ratio, Illumina Inc. improved earnings quality from 2018 to 2019. |
Cash-Flow-Statement-Based Accruals Ratio
Illumina Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 29, 2019 | Dec 30, 2018 | Dec 31, 2017 | Jan 1, 2017 | Jan 3, 2016 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Illumina stockholders | 1,002 | 826 | 726 | 463 | 462 | |
| Less: Net cash provided by operating activities | 1,051 | 1,142 | 875 | 687 | 660 | |
| Less: Net cash (used in) provided by investing activities | 745 | (1,813) | (214) | (515) | (106) | |
| Cash-flow-statement-based aggregate accruals | (794) | 1,497 | 65 | 290 | (92) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -33.57% | 65.79% | 3.10% | 16.01% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Abbott Laboratories | -1.39% | -5.39% | 12.34% | -6.46% | — | |
| AbbVie Inc. | -28.46% | -23.85% | -12.92% | 16.02% | — | |
| Amgen Inc. | -29.37% | -95.70% | -22.85% | 22.06% | — | |
| Biogen Inc. | -10.98% | 1.91% | 6.65% | 12.70% | — | |
| Bristol-Myers Squibb Co. | 10.75% | -1.14% | -28.29% | 0.76% | — | |
| Eli Lilly & Co. | 74.20% | -25.54% | -11.43% | 5.63% | — | |
| Gilead Sciences Inc. | 19.49% | -73.15% | 28.23% | 29.15% | — | |
| Johnson & Johnson | -3.04% | -5.08% | -7.40% | 4.68% | — | |
| Merck & Co. Inc. | -2.28% | -19.26% | -13.29% | -5.97% | — | |
| Pfizer Inc. | 7.93% | -10.12% | 10.69% | -1.06% | — | |
| Regeneron Pharmaceuticals Inc. | 22.48% | 28.32% | 19.22% | 13.64% | — | |
| Vertex Pharmaceuticals Inc. | 35.87% | 86.04% | -22.78% | -57.04% | — | |
| Zoetis Inc. | 2.95% | 31.33% | -4.07% | 6.41% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals & Biotechnology | 2.86% | -16.39% | -0.76% | 5.55% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 3.84% | -5.92% | 1.00% | 5.98% | — | |
Based on: 10-K (filing date: 2020-02-11), 10-K (filing date: 2019-02-12), 10-K (filing date: 2018-02-13), 10-K (filing date: 2017-02-14), 10-K (filing date: 2016-03-02).
1 2019 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -794 ÷ [(2,340 + 2,391) ÷ 2] = -33.57%
2 Click competitor name to see calculations.
| Financial ratio | Description | The company |
|---|---|---|
| Cash-flow-statement-based accruals ratio | Ratio is found by dividing cash-flow-statement-based aggregate accruals by average net operating assets. | Using the cash-flow-statement-based accruals ratio, Illumina Inc. improved earnings quality from 2018 to 2019. |