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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Eli Lilly & Co. pages available for free this week:
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Profitability Ratios
- Analysis of Liquidity Ratios
- Analysis of Short-term (Operating) Activity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Enterprise Value (EV)
- Net Profit Margin since 2005
- Debt to Equity since 2005
- Price to Book Value (P/BV) since 2005
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
Eli Lilly & Co., balance sheet computation of aggregate accruals
US$ in thousands
| 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: Short-term investments | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term borrowings and current maturities of long-term debt | ||||||
| Less: Long-term debt, excluding current maturities | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| AbbVie Inc. | ||||||
| Amgen Inc. | ||||||
| Bristol-Myers Squibb Co. | ||||||
| Danaher Corp. | ||||||
| Gilead Sciences Inc. | ||||||
| Johnson & Johnson | ||||||
| Merck & Co. Inc. | ||||||
| Pfizer Inc. | ||||||
| Regeneron Pharmaceuticals Inc. | ||||||
| Thermo Fisher Scientific Inc. | ||||||
| Vertex Pharmaceuticals Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | ||||||
| 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.
- Net Operating Assets
- There is a consistent and significant upward trend in net operating assets over the years. Starting from approximately 22.1 billion US dollars at the end of 2021, the figure increased to 24.8 billion in 2022, then jumped substantially to 33.2 billion in 2023, and further reached about 44.5 billion by the end of 2024. This pattern suggests ongoing asset growth, indicating expansion or increased investment in operating assets over the analyzed period.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals have demonstrated a volatile but rising pattern. Beginning at approximately 3.4 billion US dollars in 2021, the figure decreased to around 2.7 billion in 2022 which might indicate some reduction in accruals activity or adjustments. However, the accruals sharply increased afterward, reaching about 8.4 billion in 2023 and further rising to approximately 11.3 billion in 2024. This rise points to growing accounting adjustments affecting net operating assets, which could reflect more aggressive earning management or changing business conditions.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, representing aggregate accruals as a percentage of net operating assets, follows a consistent pattern corresponding with the accruals value changes. It decreased from 16.6% in 2021 to 11.38% in 2022, reflecting a relative reduction in accruals compared to operating assets. Subsequently, the ratio increased significantly, reaching 28.84% in 2023 and slightly rising to 29.18% in 2024. This indicates that accruals are comprising a larger portion of net operating assets over time, signaling a potential increase in financial reporting complexity or changes in accounting practices affecting asset composition.
- Overall Interpretation
- The data depicts a clear expansion in operating assets accompanied by a marked increase in accrual accounting components both in absolute terms and relative proportion. The decreasing ratio in 2022 followed by rapid growth implies shifting dynamics in accruals management. This trend could have implications for the quality and interpretation of financial reports, suggesting heightened attention to accrual-based earnings components in recent years.
Cash-Flow-Statement-Based Accruals Ratio
Eli Lilly & Co., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net income | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash used for investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| AbbVie Inc. | ||||||
| Amgen Inc. | ||||||
| Bristol-Myers Squibb Co. | ||||||
| Danaher Corp. | ||||||
| Gilead Sciences Inc. | ||||||
| Johnson & Johnson | ||||||
| Merck & Co. Inc. | ||||||
| Pfizer Inc. | ||||||
| Regeneron Pharmaceuticals Inc. | ||||||
| Thermo Fisher Scientific Inc. | ||||||
| Vertex Pharmaceuticals Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | ||||||
| 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 have demonstrated a consistent and substantial increase over the four-year period. Starting at approximately 22.13 billion US dollars in 2021, the figure rose to about 24.80 billion in 2022, followed by a more pronounced growth to 33.16 billion in 2023. By 2024, net operating assets reached 44.49 billion US dollars, indicating significant expansion in the operational capital base.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals have shown a marked upward trend. The values increased more than twofold from 1.08 billion US dollars in 2021 to 2.42 billion in 2022. Thereafter, there was a sharp rise to 8.15 billion in 2023, followed by a further increase to 11.07 billion US dollars in 2024. This pattern signals growing accrual accounting activity, which could affect earnings quality and operational cash flow comparability.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio exhibits a pronounced and continuous increase, reflecting the relative size of aggregate accruals to net operating assets. Beginning at 5.3% in 2021, the ratio nearly doubled to 10.32% in 2022. This upward trajectory accelerated in the subsequent years, reaching 28.13% in 2023 and slightly rising to 28.52% in 2024. The elevated accruals ratio may suggest increasing reliance on accrual-based measures, which warrants careful evaluation for potential earnings management or shifts in financial reporting policies.