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
Constellation Brands Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Feb 28, 2022 | Feb 28, 2021 | Feb 29, 2020 | Feb 28, 2019 | Feb 28, 2018 | Feb 28, 2017 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 25,855,800) | 27,104,800) | 27,323,200) | 29,231,500) | 20,538,700) | 18,602,400) | |
| Less: Cash and cash equivalents | 199,400) | 460,600) | 81,400) | 93,600) | 90,300) | 177,400) | |
| Operating assets | 25,656,400) | 26,644,200) | 27,241,800) | 29,137,900) | 20,448,400) | 18,425,000) | |
| Operating Liabilities | |||||||
| Total liabilities | 13,808,000) | 13,175,700) | 14,848,900) | 16,394,300) | 12,476,000) | 11,717,600) | |
| Less: Short-term borrowings | 323,000) | —) | 238,900) | 791,500) | 746,800) | 606,500) | |
| Less: Current maturities of long-term debt | 605,300) | 29,200) | 734,900) | 1,065,200) | 22,300) | 910,900) | |
| Less: Long-term debt, less current maturities | 9,488,200) | 10,413,100) | 11,210,800) | 11,759,800) | 9,417,600) | 7,720,700) | |
| Operating liabilities | 3,391,500) | 2,733,400) | 2,664,300) | 2,777,800) | 2,289,300) | 2,479,500) | |
| Net operating assets1 | 22,264,900) | 23,910,800) | 24,577,500) | 26,360,100) | 18,159,100) | 15,945,500) | |
| Balance-sheet-based aggregate accruals2 | (1,645,900) | (666,700) | (1,782,600) | 8,201,000) | 2,213,600) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | -7.13% | -2.75% | -7.00% | 36.84% | 12.98% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Coca-Cola Co. | -3.05% | — | — | — | — | — | |
| Mondelēz International Inc. | 7.90% | — | — | — | — | — | |
| PepsiCo Inc. | 0.98% | — | — | — | — | — | |
| Philip Morris International Inc. | 75.98% | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Food, Beverage & Tobacco | 11.97% | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Consumer Staples | 7.61% | 200.00% | — | — | — | — | |
Based on: 10-K (reporting date: 2022-02-28), 10-K (reporting date: 2021-02-28), 10-K (reporting date: 2020-02-29), 10-K (reporting date: 2019-02-28), 10-K (reporting date: 2018-02-28), 10-K (reporting date: 2017-02-28).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 25,656,400 – 3,391,500 = 22,264,900
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 22,264,900 – 23,910,800 = -1,645,900
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,645,900 ÷ [(22,264,900 + 23,910,800) ÷ 2] = -7.13%
4 Click competitor name to see calculations.
The financial reporting quality demonstrates a significant pivot in the relationship between reported earnings and cash flows over the five-year period. A phase of high positive accruals in the initial years transitioned into a period of consistent negative accruals, suggesting a fundamental shift in earnings composition and reporting quality.
- Net Operating Assets Trend
- Net operating assets exhibited a sharp increase between 2018 and 2019, rising from $18.16 billion to a peak of $26.36 billion. This was followed by a gradual and consistent decline over the next three fiscal years, with the balance receding to $22.26 billion by February 28, 2022.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals showed substantial volatility. After increasing from $2.21 billion in 2018 to a peak of $8.20 billion in 2019, the figures reversed sharply. Beginning in 2020, aggregate accruals became negative, recording -$1.78 billion in 2020, -$666.7 million in 2021, and -$1.65 billion in 2022.
- Accruals Ratio and Reporting Quality
- The accruals ratio peaked at 36.84% in 2019, indicating that a significant portion of the period's earnings were driven by non-cash accruals rather than cash flow. However, a marked reversal occurred in 2020, with the ratio dropping to -7.00%. The ratio remained negative through 2021 (-2.75%) and 2022 (-7.13%). This transition to negative accruals suggests that cash flows have exceeded accrual-based earnings in the latter part of the period, which is generally interpreted as an indicator of higher earnings quality and more conservative accounting.
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Cash-Flow-Statement-Based Accruals Ratio
Constellation Brands Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Feb 28, 2022 | Feb 28, 2021 | Feb 29, 2020 | Feb 28, 2019 | Feb 28, 2018 | Feb 28, 2017 | ||
|---|---|---|---|---|---|---|---|
| Net income (loss) attributable to CBI | (40,400) | 1,998,000) | (11,800) | 3,435,900) | 2,318,900) | 1,535,100) | |
| Less: Net cash provided by operating activities | 2,705,400) | 2,806,500) | 2,551,100) | 2,246,300) | 1,931,400) | 1,696,000) | |
| Less: Net cash used in investing activities | (1,035,800) | (87,900) | (531,000) | (4,831,800) | (1,423,100) | (1,461,800) | |
| Cash-flow-statement-based aggregate accruals | (1,710,000) | (720,600) | (2,031,900) | 6,021,400) | 1,810,600) | 1,300,900) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | -7.41% | -2.97% | -7.98% | 27.05% | 10.62% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Coca-Cola Co. | -1.32% | — | — | — | — | — | |
| Mondelēz International Inc. | 8.02% | — | — | — | — | — | |
| PepsiCo Inc. | 1.04% | — | — | — | — | — | |
| Philip Morris International Inc. | 57.17% | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Food, Beverage & Tobacco | 9.94% | -1.37% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Consumer Staples | 4.81% | -9.79% | — | — | — | — | |
Based on: 10-K (reporting date: 2022-02-28), 10-K (reporting date: 2021-02-28), 10-K (reporting date: 2020-02-29), 10-K (reporting date: 2019-02-28), 10-K (reporting date: 2018-02-28), 10-K (reporting date: 2017-02-28).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,710,000 ÷ [(22,264,900 + 23,910,800) ÷ 2] = -7.41%
2 Click competitor name to see calculations.
The analysis of the cash-flow-statement-based accruals ratio reveals a significant transition in financial reporting quality and the relationship between earnings and cash flows between February 2018 and February 2022. The period is characterized by an initial surge in accruals followed by a consistent shift toward negative accruals.
- Net Operating Assets
- Net operating assets showed a substantial increase from 18.16 billion USD in 2018 to a peak of 26.36 billion USD in 2019. Following this peak, a gradual downward trend was observed, with values declining to 24.58 billion USD in 2020, 23.91 billion USD in 2021, and finally 22.26 billion USD by February 2022.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals were positive in the first two years of the period, increasing from 1.81 billion USD in 2018 to 6.02 billion USD in 2019. A sharp reversal occurred in 2020, as accruals turned negative at -2.03 billion USD. This negative trend persisted through 2021 and 2022, with the latter ending at -1.71 billion USD.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio experienced a peak of 27.05% in 2019, up from 10.62% in 2018, indicating that reported earnings were significantly higher than cash flows from operations. Starting in 2020, the ratio shifted to negative values, recording -7.98% in 2020, -2.97% in 2021, and -7.41% in 2022. The transition to negative accruals ratios suggests that cash flows from operations exceeded reported net income in the latter three years, which is generally interpreted as an indicator of higher earnings quality and more conservative accounting practices.
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