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
Walgreens Boots Alliance Inc., balance sheet computation of aggregate accruals
US$ in millions
| Aug 31, 2019 | Aug 31, 2018 | Aug 31, 2017 | Aug 31, 2016 | Aug 31, 2015 | Aug 31, 2014 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 67,598) | 68,124) | 66,009) | 72,688) | 68,782) | 37,182) | |
| Less: Cash and cash equivalents | 1,023) | 785) | 3,301) | 9,807) | 3,000) | 2,646) | |
| Operating assets | 66,575) | 67,339) | 62,708) | 62,881) | 65,782) | 34,536) | |
| Operating Liabilities | |||||||
| Total liabilities | 43,447) | 41,435) | 37,735) | 42,407) | 37,482) | 16,621) | |
| Less: Short-term debt | 5,738) | 1,966) | 251) | 323) | 1,068) | 774) | |
| Less: Long-term debt | 11,098) | 12,431) | 12,684) | 18,705) | 13,315) | 3,736) | |
| Operating liabilities | 26,611) | 27,038) | 24,800) | 23,379) | 23,099) | 12,111) | |
| Net operating assets1 | 39,964) | 40,301) | 37,908) | 39,502) | 42,683) | 22,425) | |
| Balance-sheet-based aggregate accruals2 | (337) | 2,393) | (1,594) | (3,181) | 20,258) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | -0.84% | 6.12% | -4.12% | -7.74% | 62.23% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Costco Wholesale Corp. | — | — | — | — | — | — | |
| Target Corp. | — | — | — | — | — | — | |
| Walmart Inc. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-08-31), 10-K (reporting date: 2018-08-31), 10-K (reporting date: 2017-08-31), 10-K (reporting date: 2016-08-31), 10-K (reporting date: 2015-08-31), 10-K (reporting date: 2014-08-31).
1 2019 Calculation
Net operating assets = Operating assets – Operating liabilities
= 66,575 – 26,611 = 39,964
2 2019 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2019 – Net operating assets2018
= 39,964 – 40,301 = -337
3 2019 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -337 ÷ [(39,964 + 40,301) ÷ 2] = -0.84%
4 Click competitor name to see calculations.
The analysis of financial reporting quality between 2015 and 2019 reveals a significant shift in the relationship between net operating assets and aggregate accruals. The most notable observation is the extreme variance in accrual levels at the beginning of the period compared to the subsequent four years, suggesting a fundamental change in the composition of the balance sheet or the timing of revenue and expense recognition.
- Net Operating Assets Trend
- Net operating assets remained relatively stable over the five-year horizon. After a peak of 42,683 million US$ in 2015, a downward trend was observed through 2017, reaching a low of 37,908 million US$. A slight recovery followed, with assets increasing to 40,301 million US$ in 2018 and settling at 39,964 million US$ by August 31, 2019.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals exhibited high volatility. The period began with a substantial positive accrual of 20,258 million US$ in 2015, which shifted abruptly to a negative 3,181 million US$ in 2016. This volatility continued through 2019, characterized by a swing to positive 2,393 million US$ in 2018 and a subsequent decline to negative 337 million US$ in 2019.
- Accruals Ratio and Earnings Quality
- The balance-sheet-based accruals ratio provides insight into the quality of reported earnings. A high ratio of 62.23% in 2015 indicates that a significant portion of the net operating assets was supported by non-cash accruals, which typically correlates with lower earnings quality. However, a sharp correction occurred in 2016, with the ratio dropping to -7.74%. For the remainder of the period, the ratio remained relatively low and fluctuated near the zero bound, ranging from -7.74% to 6.12%. This stabilization suggests that from 2016 onward, reported earnings were more closely aligned with cash flow generation.
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Cash-Flow-Statement-Based Accruals Ratio
Walgreens Boots Alliance Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Aug 31, 2019 | Aug 31, 2018 | Aug 31, 2017 | Aug 31, 2016 | Aug 31, 2015 | Aug 31, 2014 | ||
|---|---|---|---|---|---|---|---|
| Net earnings attributable to Walgreens Boots Alliance, Inc. | 3,982) | 5,024) | 4,078) | 4,173) | 4,220) | 1,932) | |
| Less: Net cash provided by operating activities | 5,594) | 8,265) | 7,251) | 7,847) | 5,664) | 3,893) | |
| Less: Net cash used for investing activities | (2,307) | (5,501) | (843) | (3,517) | (4,276) | (1,731) | |
| Cash-flow-statement-based aggregate accruals | 695) | 2,260) | (2,330) | (157) | 2,832) | (230) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 1.73% | 5.78% | -6.02% | -0.38% | 8.70% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Costco Wholesale Corp. | — | — | — | — | — | — | |
| Target Corp. | — | — | — | — | — | — | |
| Walmart Inc. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2019-08-31), 10-K (reporting date: 2018-08-31), 10-K (reporting date: 2017-08-31), 10-K (reporting date: 2016-08-31), 10-K (reporting date: 2015-08-31), 10-K (reporting date: 2014-08-31).
1 2019 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 695 ÷ [(39,964 + 40,301) ÷ 2] = 1.73%
2 Click competitor name to see calculations.
The financial reporting quality analysis between 2015 and 2019 reveals a period of significant volatility in aggregate accruals relative to net operating assets. While the asset base remained relatively stable, the accruals ratio experienced substantial swings, indicating fluctuating gaps between reported earnings and actual cash flow from operations.
- Net Operating Assets Trend
- Net operating assets exhibited a slight downward trend from 2015 to 2017, moving from 42,683 million US$ to 37,908 million US$. A modest recovery occurred in 2018 and 2019, with values stabilizing around 40,000 million US$. This stability in the asset base suggests that the volatility seen in the accruals ratio is driven by earnings and cash flow dynamics rather than massive shifts in the company's operating structure.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals showed erratic movement throughout the five-year period. High positive accruals were recorded in 2015 (2,832 million US$) and 2018 (2,260 million US$), whereas the period between 2016 and 2017 saw a transition into negative territory, reaching a trough of -2,330 million US$ in 2017. This shift indicates alternating periods where reported accounting profits significantly exceeded cash flows, followed by periods where cash flows exceeded reported profits.
- Accruals Ratio Interpretation
- The accruals ratio mirrored the volatility of the aggregate accruals. A peak of 8.70% in 2015 suggests a higher reliance on non-cash earnings during that fiscal year. The ratio then plummeted to -0.38% in 2016 and reached a low of -6.02% in 2017, signifying a period of high cash flow relative to accrual-based earnings. A sharp reversal occurred in 2018, with the ratio climbing back to 5.78%, before moderating to 1.73% in 2019.
The observed pattern of alternating positive and negative accruals suggests a cyclical or event-driven impact on the timing of cash flows versus revenue recognition. The significant swing from -6.02% in 2017 to 5.78% in 2018 is particularly notable, as it represents a substantial shift in the quality of reported earnings over a twelve-month period.
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