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
Monster Beverage Corp., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 9,686,522) | 8,293,105) | 7,804,784) | 6,202,716) | 5,150,352) | |
| Less: Cash and cash equivalents | 2,297,675) | 1,307,141) | 1,326,462) | 1,180,413) | 797,957) | |
| Less: Short-term investments | 955,605) | 1,362,314) | 1,749,727) | 881,354) | 533,063) | |
| Operating assets | 6,433,242) | 5,623,650) | 4,728,595) | 4,140,949) | 3,819,332) | |
| Operating Liabilities | ||||||
| Total liabilities | 1,457,778) | 1,268,064) | 1,237,833) | 1,041,856) | 979,071) | |
| Less: Current finance lease liabilities | 6,449) | 757) | 960) | 799) | 1,485) | |
| Less: Noncurrent finance lease liabilities | 19) | 41) | 41) | 24) | —) | |
| Operating liabilities | 1,451,310) | 1,267,266) | 1,236,832) | 1,041,033) | 977,586) | |
| Net operating assets1 | 4,981,932) | 4,356,384) | 3,491,763) | 3,099,916) | 2,841,746) | |
| Balance-sheet-based aggregate accruals2 | 625,548) | 864,621) | 391,847) | 258,170) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 13.40% | 22.03% | 11.89% | 8.69% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Coca-Cola Co. | 4.65% | -3.05% | — | — | — | |
| Mondelēz International Inc. | -4.19% | 7.90% | — | — | — | |
| PepsiCo Inc. | 3.36% | 0.98% | — | — | — | |
| Philip Morris International Inc. | 5.21% | 75.98% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Food, Beverage & Tobacco | 2.19% | 11.97% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | 2.58% | 7.61% | 200.00% | — | — | |
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 6,433,242 – 1,451,310 = 4,981,932
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 4,981,932 – 4,356,384 = 625,548
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 625,548 ÷ [(4,981,932 + 4,356,384) ÷ 2] = 13.40%
4 Click competitor name to see calculations.
An examination of the financial reporting quality metrics reveals a steady expansion of net operating assets alongside significant fluctuations in balance-sheet-based aggregate accruals between 2020 and 2023.
- Net Operating Assets Trend
- A consistent upward trajectory is observed in net operating assets, which increased from $3,099,916 thousand in 2020 to $4,981,932 thousand by the end of 2023. This represents a sustained growth in the operating asset base over the four-year period.
- Aggregate Accruals Analysis
- Balance-sheet-based aggregate accruals experienced substantial growth from 2020 to 2022, rising from $258,170 thousand to a peak of $864,621 thousand. This trend reversed in 2023, as accruals declined to $625,548 thousand, indicating a reduction in the total volume of non-cash accounting adjustments relative to the balance sheet.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio exhibited significant volatility, increasing from 8.69% in 2020 to a peak of 22.03% in 2022 before moderating to 13.40% in 2023. The peak in 2022 suggests a period where a higher proportion of reported earnings was driven by accruals rather than cash flows. The subsequent decline in 2023 indicates an improvement in the quality of earnings, as the gap between accounting profit and cash flow narrowed relative to the net operating asset base.
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Cash-Flow-Statement-Based Accruals Ratio
Monster Beverage Corp., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Net income | 1,630,988) | 1,191,624) | 1,377,475) | 1,409,594) | 1,107,835) | |
| Less: Net cash provided by operating activities | 1,717,753) | 887,699) | 1,155,741) | 1,364,163) | 1,113,762) | |
| Less: Net cash used in investing activities | (193,395) | (161,367) | (992,022) | (472,487) | (326,724) | |
| Cash-flow-statement-based aggregate accruals | 106,630) | 465,292) | 1,213,756) | 517,918) | 320,797) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 2.28% | 11.86% | 36.83% | 17.43% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Coca-Cola Co. | 4.51% | -1.32% | — | — | — | |
| Mondelēz International Inc. | -5.47% | 8.02% | — | — | — | |
| PepsiCo Inc. | 2.17% | 1.04% | — | — | — | |
| Philip Morris International Inc. | 6.40% | 57.17% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Food, Beverage & Tobacco | 1.72% | 9.94% | -1.37% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | 2.27% | 4.81% | -9.79% | — | — | |
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 106,630 ÷ [(4,981,932 + 4,356,384) ÷ 2] = 2.28%
2 Click competitor name to see calculations.
The financial data indicates a period of consistent expansion in net operating assets alongside a significant reduction in the cash-flow-statement-based accruals ratio. This divergence suggests a transition toward higher earnings quality, as the gap between accrual-based accounting income and actual cash flow narrowed substantially over the analyzed four-year period.
- Net Operating Assets Trend
- A steady upward trajectory is observed in net operating assets, which increased from 3,099,916 thousand US dollars in 2020 to 4,981,932 thousand US dollars by the end of 2023. This represents a continuous growth in the organization's operating base over the period.
- Aggregate Accruals Behavior
- Cash-flow-statement-based aggregate accruals exhibited significant volatility, peaking in 2021 at 1,213,756 thousand US dollars before declining sharply to 106,630 thousand US dollars in 2023. This trend indicates that a progressively smaller portion of reported earnings is attributed to non-cash accounting adjustments.
- Accruals Ratio Analysis
- The accruals ratio mirrored the trend of aggregate accruals, reaching a high of 36.83% in 2021 and subsequently falling precipitously to 11.86% in 2022 and 2.28% in 2023. The sharp decrease in this ratio suggests an improvement in financial reporting quality, as profits are increasingly supported by cash flows rather than accruals.
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