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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Kraft Heinz Co. pages available for free this week:
- Balance Sheet: Assets
- Common-Size Income Statement
- Analysis of Solvency Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Analysis of Geographic Areas
- Dividend Discount Model (DDM)
- Present Value of Free Cash Flow to Equity (FCFE)
- Total Asset Turnover since 2015
- Price to Operating Profit (P/OP) since 2015
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
Kraft Heinz Co., balance sheet computation of aggregate accruals
US$ in millions
| Dec 28, 2019 | Dec 29, 2018 | Dec 30, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Commercial paper and other short-term debt | ||||||
| Less: Current portion of long-term debt | ||||||
| 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 | ||||||
| Coca-Cola Co. | ||||||
| Mondelēz International Inc. | ||||||
| PepsiCo Inc. | ||||||
| Philip Morris International Inc. | ||||||
Based on: 10-K (reporting date: 2019-12-28), 10-K (reporting date: 2018-12-29), 10-K (reporting date: 2017-12-30), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= – =
3 2019 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 displayed a fluctuating trend over the four-year period. Beginning at approximately 85,774 million US dollars at the end of 2016, the value increased notably to 96,154 million in 2017. However, this was followed by a decline over the next two years, dropping to 81,816 million in 2018 and further decreasing to 78,714 million by the end of 2019. This suggests a peak in net operating assets in 2017, with a subsequent contraction.
- Balance-Sheet-Based Aggregate Accruals
- The balance-sheet-based aggregate accruals exhibited significant volatility during the period analyzed. In 2016, a negative accrual value of -859 million US dollars was reported, which shifted dramatically to a positive accrual of 10,380 million in 2017. The following years saw a reversal to negative values again, with -14,338 million in 2018 and -3,102 million in 2019. This pattern indicates considerable inconsistency in accruals, with a notable spike in 2017 contrasted by large negative adjustments in subsequent years.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrored the volatility seen in aggregate accruals. Starting with a slightly negative -1% at year-end 2016, there was a sharp increase to 11.41% in 2017, reflecting substantial accrual activity relative to net operating assets. Following this peak, the ratio plunged to -16.11% in 2018 and moderated to -3.86% in 2019. The negative ratios in the last two years suggest a reversal in the accrual trend compared to the 2017 peak, indicating potential changes in earnings quality or accounting adjustments.
Cash-Flow-Statement-Based Accruals Ratio
Kraft Heinz Co., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 28, 2019 | Dec 29, 2018 | Dec 30, 2017 | Dec 31, 2016 | Dec 31, 2015 | ||
|---|---|---|---|---|---|---|
| Net income (loss) attributable to Kraft Heinz | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash (used for) 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 | ||||||
| Coca-Cola Co. | ||||||
| Mondelēz International Inc. | ||||||
| PepsiCo Inc. | ||||||
| Philip Morris International Inc. | ||||||
Based on: 10-K (reporting date: 2019-12-28), 10-K (reporting date: 2018-12-29), 10-K (reporting date: 2017-12-30), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 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 displayed a fluctuating trend over the four-year period. Beginning at 85,774 million US dollars in 2016, there was a noticeable increase to 96,154 million in 2017. However, the value decreased significantly in the subsequent years, falling to 81,816 million in 2018 and further to 78,714 million in 2019. This trend suggests an initial expansion followed by a reduction in net operating assets, indicating possible changes in the company's investment or operational strategies during this period.
- Cash-flow-statement-based Aggregate Accruals
- This measure showed considerable volatility over the periods examined. It started with a negative value of -493 million US dollars in 2016, turned sharply positive to 9,316 million in 2017, then shifted dramatically to a negative -13,054 million in 2018, and finally moved to a negative -3,128 million in 2019. The sharp swings in aggregate accruals may reflect fluctuations in earnings quality, operational adjustments, or changes in accounting estimates and policies.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrored the fluctuations seen in aggregate accruals. It began with a slight negative ratio of -0.57% in 2016, surged to a positive 10.24% in 2017, then declined to a markedly negative -14.67% in 2018, and moderated to -3.9% in 2019. Such variability indicates significant changes in the relationship between accruals and cash flows from operations, which may signal variations in earnings quality and the reliability of reported earnings across these years.