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
CVS Health Corp., 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 | 253,215) | 249,728) | 228,275) | 232,999) | 230,715) | |
| Less: Cash and cash equivalents | 8,586) | 8,196) | 12,945) | 9,408) | 7,854) | |
| Less: Investments | 2,407) | 3,259) | 2,778) | 3,117) | 3,000) | |
| Operating assets | 242,222) | 238,273) | 212,552) | 220,474) | 219,861) | |
| Operating Liabilities | ||||||
| Total liabilities | 177,485) | 173,092) | 156,960) | 157,618) | 161,014) | |
| Less: Short-term debt | 2,119) | 200) | —) | —) | —) | |
| Less: Current portion of long-term debt | 3,624) | 2,772) | 1,778) | 4,205) | 5,440) | |
| Less: Long-term debt, excluding current portion | 60,527) | 58,638) | 50,476) | 51,971) | 59,207) | |
| Operating liabilities | 111,215) | 111,482) | 104,706) | 101,442) | 96,367) | |
| Net operating assets1 | 131,007) | 126,791) | 107,846) | 119,032) | 123,494) | |
| Balance-sheet-based aggregate accruals2 | 4,216) | 18,945) | (11,186) | (4,462) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 3.27% | 16.15% | -9.86% | -3.68% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Abbott Laboratories | 15.62% | 6.06% | -0.73% | — | — | |
| Elevance Health Inc. | 29.70% | 7.14% | 0.32% | — | — | |
| Intuitive Surgical Inc. | 41.97% | 15.55% | -10.21% | — | — | |
| Medtronic PLC | -0.93% | 2.69% | -1.37% | — | — | |
| UnitedHealth Group Inc. | 16.02% | 13.41% | 17.32% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 14.53% | 8.90% | 6.46% | 200.00% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 5.49% | 7.79% | 5.30% | 200.00% | — | |
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
= 242,222 – 111,215 = 131,007
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 131,007 – 126,791 = 4,216
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 4,216 ÷ [(131,007 + 126,791) ÷ 2] = 3.27%
4 Click competitor name to see calculations.
The analysis of the balance-sheet-based accruals reveals significant volatility in the relationship between accrual-based earnings and cash flow from 2021 through 2024. While the net operating assets maintained a general upward trajectory after a slight contraction in 2022, the aggregate accruals experienced substantial swings in both direction and magnitude, impacting the overall reporting quality metrics.
- Net Operating Assets Trend
- Net operating assets decreased from US$ 119,032 million in 2021 to US$ 107,846 million in 2022, before recovering and growing consistently to US$ 131,007 million by December 31, 2024. This expansion of the asset base serves as the foundation for the accruals ratio, reflecting an increase in the total operating resources utilized by the entity.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals shifted from negative values of US$ -4,462 million in 2021 and US$ -11,186 million in 2022 to a sharp positive peak of US$ 18,945 million in 2023. By the end of 2024, this figure moderated significantly to US$ 4,216 million. The transition from negative to positive accruals indicates a shift where accrual-based earnings began to exceed cash-based equivalents, particularly during the 2023 fiscal year.
- Accruals Ratio and Reporting Quality
- The accruals ratio mirrored the volatility of the aggregate accruals, moving from -3.68% in 2021 to a low of -9.86% in 2022, followed by a substantial spike to 16.15% in 2023. This peak represents a period of heightened divergence between reported earnings and cash flows, which typically suggests a decrease in the quality of earnings as non-cash components of income increased. The ratio subsequently normalized to 3.27% in 2024, indicating a return toward a more stable relationship between earnings and the underlying asset base.
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Cash-Flow-Statement-Based Accruals Ratio
CVS Health Corp., 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 income attributable to CVS Health | 4,614) | 8,344) | 4,149) | 7,910) | 7,179) | |
| Less: Net cash provided by operating activities | 9,107) | 13,426) | 16,177) | 18,265) | 15,865) | |
| Less: Net cash used in investing activities | (7,613) | (20,889) | (5,047) | (5,261) | (5,534) | |
| Cash-flow-statement-based aggregate accruals | 3,120) | 15,807) | (6,981) | (5,094) | (3,152) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 2.42% | 13.47% | -6.15% | -4.20% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Abbott Laboratories | 14.32% | 3.55% | -2.08% | — | — | |
| Elevance Health Inc. | 16.15% | 12.87% | 8.35% | — | — | |
| Intuitive Surgical Inc. | 30.74% | 4.54% | -20.88% | — | — | |
| Medtronic PLC | -1.10% | 1.80% | -0.97% | — | — | |
| UnitedHealth Group Inc. | 7.71% | 7.40% | 21.73% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 8.55% | 5.82% | 8.70% | 11.34% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 4.00% | 8.59% | 4.25% | 14.62% | — | |
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 × 3,120 ÷ [(131,007 + 126,791) ÷ 2] = 2.42%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality from 2021 to 2024 reveals a period of significant volatility in accruals relative to net operating assets. While net operating assets exhibited a general upward trajectory after a brief decline in 2022, the cash-flow-statement-based accruals ratio underwent a sharp reversal in 2023 before stabilizing in 2024.
- Net Operating Assets Trend
- Net operating assets fluctuated over the four-year period, starting at 119,032 million US dollars in 2021 and decreasing to 107,846 million US dollars in 2022. A subsequent expansion occurred, with assets rising to 126,791 million US dollars in 2023 and peaking at 131,007 million US dollars by December 31, 2024.
- Aggregate Accruals Performance
- Cash-flow-statement-based aggregate accruals were negative in 2021 and 2022, recorded at -5,094 million US dollars and -6,981 million US dollars, respectively. This trend shifted abruptly in 2023, where accruals surged to a positive 15,807 million US dollars, before receding to 3,120 million US dollars in 2024.
- Accruals Ratio and Earnings Quality
- The accruals ratio mirrored the volatility of aggregate accruals. In 2021 and 2022, the ratio remained negative at -4.20% and -6.15%, suggesting that cash flows from operations exceeded accrual-based earnings during this window. A significant spike occurred in 2023, with the ratio reaching 13.47%, indicating a divergence where earnings were substantially higher than cash flows. By 2024, the ratio normalized to 2.42%, suggesting a reduction in the gap between accrual accounting and actual cash movement.
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