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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Elevance Health Inc. pages available for free this week:
- Statement of Comprehensive Income
- Balance Sheet: Assets
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Common Stock Valuation Ratios
- Enterprise Value to EBITDA (EV/EBITDA)
- Capital Asset Pricing Model (CAPM)
- Dividend Discount Model (DDM)
- Total Asset Turnover since 2005
- Price to Book Value (P/BV) since 2005
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
Elevance Health Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Fixed maturity securities | ||||||
| Less: Equity securities | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term borrowings | ||||||
| Less: Current portion of long-term debt | ||||||
| Less: Long-term debt, less 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 | ||||||
| Abbott Laboratories | ||||||
| CVS Health Corp. | ||||||
| Intuitive Surgical Inc. | ||||||
| Medtronic PLC | ||||||
| UnitedHealth Group Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | ||||||
Based on: 10-K (reporting date: 2024-12-31), 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).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= – =
3 2024 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.
The analysis of the annual financial reporting quality measure data reveals significant changes over the observed periods.
- Net Operating Assets
- There is a steady increase in net operating assets from 26,131 million US dollars in 2021 to 37,977 million US dollars in 2024. This upward trend indicates a consistent expansion in the company's operational asset base over the four years.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals exhibit considerable volatility across the periods. After a high value of 3,630 million US dollars in 2021, there is a sharp decline to 85 million US dollars in 2022. Subsequently, it rises again to 1,940 million US dollars in 2023 and then increases significantly to 9,821 million US dollars in 2024. This variability points to fluctuating adjustments in accruals, which may affect earnings quality and cash flow interpretation.
- Balance-sheet-based Accruals Ratio
- The accruals ratio follows a pattern similar to aggregate accruals. It decreases sharply from 14.93% in 2021 to 0.32% in 2022, then increases to 7.14% in 2023, before reaching a notably high 29.7% in 2024. The substantial rise in 2024 suggests a growing proportion of accruals relative to net operating assets, which could imply increased estimation uncertainty or aggressive accounting practices during that period.
Overall, while net operating assets show consistent growth, the accrual measures indicate considerable fluctuations, with a pronounced increase in accruals and their ratio in the most recent year. Such trends warrant closer examination to assess their implications for earnings quality and financial reporting reliability.
Cash-Flow-Statement-Based Accruals Ratio
Elevance Health Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Shareholders’ net income | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash used in investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Abbott Laboratories | ||||||
| CVS Health Corp. | ||||||
| Intuitive Surgical Inc. | ||||||
| Medtronic PLC | ||||||
| UnitedHealth Group Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | ||||||
Based on: 10-K (reporting date: 2024-12-31), 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).
1 2024 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 demonstrate a consistent upward trend throughout the periods analyzed. Starting from 26,131 million US dollars in 2021, there is a marginal increase in 2022 to 26,216 million. A more noticeable rise occurs in 2023 reaching 28,156 million, followed by a significant jump to 37,977 million in 2024. This suggests an expansion in the company's operating asset base over time, particularly marked in the last year.
- Cash-Flow-Statement-Based Aggregate Accruals
- This measure exhibits a fluctuating pattern. It initiates at 7,378 million US dollars in 2021 and then experiences a substantial decline to 2,186 million in 2022. The value increases again in 2023 to 3,498 million, continuing upward in 2024 to 5,339 million. Despite the initial drop, the subsequent recovery and growth imply improvements in the accrual component of the cash flow statement.
- Cash-Flow-Statement-Based Accruals Ratio (%)
- The accruals ratio displays a downward shift from 30.34% in 2021 to 8.35% in 2022, indicating a marked decrease in the proportion of accruals relative to net operating assets. In the following years, the ratio increases progressively to 12.87% in 2023 and 16.15% in 2024, reflecting a moderate upward adjustment but still remaining significantly below the initial level seen in 2021. This pattern could suggest initial improvements in the quality of earnings with less reliance on accruals, followed by a partial reversion.