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
Bristol-Myers Squibb Co., 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 | 92,603) | 95,159) | 96,820) | 109,314) | 118,481) | |
| Less: Cash and cash equivalents | 10,346) | 11,464) | 9,123) | 13,979) | 14,546) | |
| Less: Marketable debt securities | 513) | 816) | 130) | 2,987) | 1,285) | |
| Operating assets | 81,744) | 82,879) | 87,567) | 92,348) | 102,650) | |
| Operating Liabilities | ||||||
| Total liabilities | 76,215) | 65,674) | 65,702) | 73,308) | 80,599) | |
| Less: Short-term debt obligations | 2,046) | 3,119) | 4,264) | 4,948) | 2,340) | |
| Less: Long-term debt, excluding current portion | 47,603) | 36,653) | 35,056) | 39,605) | 48,336) | |
| Operating liabilities | 26,566) | 25,902) | 26,382) | 28,755) | 29,923) | |
| Net operating assets1 | 55,178) | 56,977) | 61,185) | 63,593) | 72,727) | |
| Balance-sheet-based aggregate accruals2 | (1,799) | (4,208) | (2,408) | (9,134) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -3.21% | -7.12% | -3.86% | -13.40% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| AbbVie Inc. | 13.10% | -22.39% | -14.27% | -9.69% | — | |
| Amgen Inc. | -10.36% | 57.08% | 4.07% | 0.70% | — | |
| Danaher Corp. | -3.94% | 3.48% | -1.55% | 16.41% | — | |
| Eli Lilly & Co. | 29.18% | 28.84% | 11.38% | 16.60% | — | |
| Gilead Sciences Inc. | -11.79% | 1.04% | -2.92% | -2.34% | — | |
| Johnson & Johnson | 10.61% | -21.13% | 19.84% | 3.75% | — | |
| Merck & Co. Inc. | 6.20% | 3.16% | 0.46% | 25.14% | — | |
| Pfizer Inc. | -11.48% | 30.66% | 24.95% | -7.11% | — | |
| Regeneron Pharmaceuticals Inc. | 25.51% | 1.17% | 11.07% | 43.54% | — | |
| Thermo Fisher Scientific Inc. | 2.28% | 4.96% | -1.78% | 43.38% | — | |
| Vertex Pharmaceuticals Inc. | 42.13% | 61.24% | 14.07% | 18.20% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 1.64% | 7.36% | 4.84% | 6.18% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 5.24% | 8.72% | 3.57% | 4.72% | — | |
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
= 81,744 – 26,566 = 55,178
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 55,178 – 56,977 = -1,799
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,799 ÷ [(55,178 + 56,977) ÷ 2] = -3.21%
4 Click competitor name to see calculations.
- Net Operating Assets
- There is a clear downward trend in net operating assets over the four-year period. The value decreased from 63,593 million US dollars at the end of 2021 to 55,178 million US dollars by the end of 2024. This represents a gradual reduction each year, with the largest decline occurring between 2022 and 2023. The decreasing trend may indicate asset optimization, potential divestitures, or efficiency improvements in asset management.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals show considerable fluctuation throughout the period but maintain negative values, indicating a consistent pattern of accrual adjustments reducing net income relative to cash flows. The highest magnitude negative accrual was observed in 2021 at -9,134 million US dollars. There was a significant reduction (less negative) in 2022 to -2,408 million, followed by a moderate increase (more negative) in 2023 to -4,208 million, and then a decrease again in 2024 to -1,799 million. These movements suggest varying adjustments in non-cash accounting items influencing earnings and potential changes in earnings quality.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, closely follows the pattern seen in aggregate accruals. It declined in absolute terms from -13.4% in 2021 to -3.21% in 2024, indicating a decreased proportion of accrual adjustments relative to net operating assets. The ratio saw a marked improvement from 2021 to 2022, a return to a more negative level in 2023, and improvement again in 2024. This change suggests a general trend towards lower accrual-based distortions in earnings, potentially reflecting enhanced earnings quality or more conservative accounting practices in recent years.
Cash-Flow-Statement-Based Accruals Ratio
Bristol-Myers Squibb Co., 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 | ||
|---|---|---|---|---|---|---|
| Net earnings (loss) attributable to BMS | (8,948) | 8,025) | 6,327) | 6,994) | (9,015) | |
| Less: Net cash provided by operating activities | 15,190) | 13,860) | 13,066) | 16,207) | 14,052) | |
| Less: Net cash used in investing activities | (21,352) | (2,295) | (1,062) | (538) | (10,859) | |
| Cash-flow-statement-based aggregate accruals | (2,786) | (3,540) | (5,677) | (8,675) | (12,208) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -4.97% | -5.99% | -9.10% | -12.73% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| AbbVie Inc. | 10.32% | -24.89% | -16.25% | -10.28% | — | |
| Amgen Inc. | -11.16% | 52.47% | 8.81% | -12.87% | — | |
| Danaher Corp. | -1.25% | 8.20% | 1.44% | 18.48% | — | |
| Eli Lilly & Co. | 28.52% | 28.13% | 10.32% | 5.30% | — | |
| Gilead Sciences Inc. | -18.05% | -0.19% | -4.95% | -4.86% | — | |
| Johnson & Johnson | 10.58% | 13.66% | 10.78% | 8.23% | — | |
| Merck & Co. Inc. | 5.00% | 2.23% | 0.61% | 29.09% | — | |
| Pfizer Inc. | -5.24% | 19.96% | 18.46% | 13.18% | — | |
| Regeneron Pharmaceuticals Inc. | 12.04% | 14.35% | 18.61% | 49.24% | — | |
| Thermo Fisher Scientific Inc. | 4.71% | 3.80% | -0.06% | 34.69% | — | |
| Vertex Pharmaceuticals Inc. | 43.34% | 62.03% | -14.45% | 1.38% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 2.07% | 9.68% | 2.52% | 8.19% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 3.82% | 9.13% | 3.06% | 6.04% | — | |
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 × -2,786 ÷ [(55,178 + 56,977) ÷ 2] = -4.97%
2 Click competitor name to see calculations.
- Net operating assets
- The value of net operating assets shows a consistent downward trend across the observed periods. Starting at 63,593 million US dollars at the end of 2021, it decreased to 61,185 million in 2022, followed by a further reduction to 56,977 million in 2023, and finally to 55,178 million by the end of 2024. This represents a gradual contraction in net operating assets over four years.
- Cash-flow-statement-based aggregate accruals
- Aggregate accruals, expressed in millions of US dollars, also displayed a decreasing magnitude but with a diminishing absolute value. From -8,675 million at the close of 2021, the figure improved (became less negative) to -5,677 million in 2022, then to -3,540 million in 2023, and further to -2,786 million at the end of 2024. This pattern indicates a reduction in negative accruals over time, suggesting improving cash flow quality.
- Cash-flow-statement-based accruals ratio
- Mirroring the trend in aggregate accruals, the accruals ratio also improved steadily. It was -12.73% in 2021, rising to -9.1% in 2022, then to -5.99% in 2023, and finally reaching -4.97% in 2024. The decreasing negative percentage reflects a continuous enhancement in the proportion of accruals relative to cash flows, signaling a potential improvement in earnings quality.