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
Shockwave Medical Inc., 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 | 1,566,563) | 646,089) | 345,682) | 272,042) | 231,938) | |
| Less: Cash and cash equivalents | 328,422) | 156,586) | 89,209) | 50,423) | 139,045) | |
| Less: Short-term investments | 662,132) | 147,907) | 111,772) | 151,931) | 56,304) | |
| Operating assets | 576,009) | 341,596) | 144,701) | 69,688) | 36,589) | |
| Operating Liabilities | ||||||
| Total liabilities | 897,886) | 134,773) | 103,852) | 46,388) | 39,285) | |
| Less: Debt, current portion | —) | —) | 5,500) | 3,300) | 6,667) | |
| Less: Convertible debt, noncurrent portion | 731,863) | —) | —) | —) | —) | |
| Less: Debt, noncurrent portion | —) | 24,198) | 11,630) | 13,319) | 7,152) | |
| Operating liabilities | 166,023) | 110,575) | 86,722) | 29,769) | 25,466) | |
| Net operating assets1 | 409,986) | 231,021) | 57,979) | 39,919) | 11,123) | |
| Balance-sheet-based aggregate accruals2 | 178,965) | 173,042) | 18,060) | 28,796) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 55.84% | 119.75% | 36.90% | 112.83% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Abbott Laboratories | 6.06% | -0.73% | — | — | — | |
| Elevance Health Inc. | 7.14% | 0.32% | — | — | — | |
| Intuitive Surgical Inc. | 15.55% | -10.21% | — | — | — | |
| Medtronic PLC | 2.69% | -1.37% | — | — | — | |
| UnitedHealth Group Inc. | 13.41% | 17.32% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 8.90% | 6.46% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 7.79% | 5.30% | 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
= 576,009 – 166,023 = 409,986
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 409,986 – 231,021 = 178,965
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 178,965 ÷ [(409,986 + 231,021) ÷ 2] = 55.84%
4 Click competitor name to see calculations.
Net operating assets exhibited a consistent and aggressive upward trajectory between 2020 and 2023, increasing from US$ 39.9 million to US$ 410.0 million. This growth indicates a substantial expansion of the operational balance sheet over the four-year period.
- Net Operating Assets Growth
- The most significant acceleration occurred between 2021 and 2022, where net operating assets grew by approximately 298%. This suggests a period of rapid capitalization or a sharp increase in working capital requirements to support business expansion.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals followed a non-linear path, decreasing slightly from US$ 28.8 million in 2020 to US$ 18.1 million in 2021, before surging to US$ 173.0 million in 2022. The value remained relatively stable in 2023, closing at US$ 179.0 million.
- Balance-sheet-based Accruals Ratio
- The accruals ratio demonstrated high volatility, characterized by alternating peaks and troughs. The ratio reached high levels in 2020 (112.83%) and 2022 (119.75%), while dropping significantly in 2021 (36.90%) and 2023 (55.84%).
The volatility of the accruals ratio suggests fluctuations in the quality of reported earnings relative to cash flow. The spikes in 2020 and 2022 indicate periods where non-cash accruals contributed disproportionately to the balance sheet relative to operating assets. Conversely, the decreases in 2021 and 2023 suggest a shift toward higher earnings quality, as the gap between accrual-based reporting and cash-based reality narrowed.
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Cash-Flow-Statement-Based Accruals Ratio
Shockwave Medical Inc., 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 (loss) | 147,278) | 215,996) | (9,136) | (65,699) | (51,109) | |
| Less: Net cash provided by (used in) operating activities | 196,053) | 117,732) | 15,036) | (71,184) | (48,107) | |
| Less: Net cash (used in) provided by investing activities | (625,727) | (62,150) | 26,416) | (107,473) | (59,543) | |
| Cash-flow-statement-based aggregate accruals | 576,952) | 160,414) | (50,588) | 112,958) | 56,541) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 180.01% | 111.01% | -103.35% | 442.61% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Abbott Laboratories | 3.55% | -2.08% | — | — | — | |
| Elevance Health Inc. | 12.87% | 8.35% | — | — | — | |
| Intuitive Surgical Inc. | 4.54% | -20.88% | — | — | — | |
| Medtronic PLC | 1.80% | -0.97% | — | — | — | |
| UnitedHealth Group Inc. | 7.40% | 21.73% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 5.82% | 8.70% | 11.34% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 8.59% | 4.25% | 14.62% | — | — | |
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 × 576,952 ÷ [(409,986 + 231,021) ÷ 2] = 180.01%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality reveals a significant expansion in the operating scale of the organization accompanied by high volatility in accrual levels. Net operating assets have demonstrated consistent and accelerating growth over the four-year period, increasing from US$ 39,919 thousand in 2020 to US$ 409,986 thousand by the end of 2023.
- Net Operating Assets Trend
- A substantial upward trajectory is evident, with a particularly sharp increase occurring between 2021 and 2022, where assets grew from US$ 57,979 thousand to US$ 231,021 thousand. This progression indicates a rapid scaling of the operational base.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals exhibit significant fluctuations. Following a positive value in 2020, the figures shifted to a negative US$ 50,588 thousand in 2021 before rebounding sharply to US$ 160,414 thousand in 2022 and reaching US$ 576,952 thousand in 2023. The scale of these accruals in the final period exceeds the total net operating assets, indicating that a significant portion of the reported financial performance is not yet reflected in cash flows.
- Accruals Ratio Analysis
- The cash-flow-statement-based accruals ratio shows extreme variance, starting at 442.61% in 2020, dropping to -103.35% in 2021, and subsequently rising to 111.01% in 2022 and 180.01% in 2023. The elevated ratio in 2023 suggests that accruals are significantly higher than the underlying operating asset base, which typically indicates a divergence between reported earnings and cash flow generation, potentially impacting the perceived quality of earnings.
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