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
Eli Lilly & Co., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 112,476) | 78,715) | 64,006) | 49,490) | 48,806) | |
| Less: Cash and cash equivalents | 7,268) | 3,268) | 2,819) | 2,067) | 3,819) | |
| Operating assets | 105,208) | 75,447) | 61,188) | 47,423) | 44,988) | |
| Operating Liabilities | ||||||
| Total liabilities | 85,941) | 64,443) | 53,143) | 38,714) | 39,651) | |
| Less: Short-term borrowings and current maturities of long-term debt | 1,635) | 5,117) | 6,905) | 1,501) | 1,538) | |
| Less: Long-term debt, excluding current maturities | 40,868) | 28,527) | 18,321) | 14,738) | 15,346) | |
| Operating liabilities | 43,438) | 30,799) | 27,917) | 22,476) | 22,766) | |
| Net operating assets1 | 61,770) | 44,647) | 33,270) | 24,947) | 22,221) | |
| Balance-sheet-based aggregate accruals2 | 17,123) | 11,377) | 8,323) | 2,726) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 32.18% | 29.20% | 28.59% | 11.56% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| AbbVie Inc. | -9.59% | 13.10% | -22.39% | -14.27% | — | |
| Amgen Inc. | 0.24% | -10.36% | 57.08% | 4.07% | — | |
| Bristol-Myers Squibb Co. | -4.13% | -3.21% | -7.12% | -3.86% | — | |
| Danaher Corp. | 4.42% | -3.94% | 3.48% | -1.55% | — | |
| Gilead Sciences Inc. | 10.43% | -11.79% | 1.04% | -2.92% | — | |
| Johnson & Johnson | 26.71% | 10.61% | -21.13% | 19.84% | — | |
| Merck & Co. Inc. | 22.44% | 6.20% | 3.16% | 0.46% | — | |
| Pfizer Inc. | 4.15% | -11.48% | 30.66% | 24.95% | — | |
| Regeneron Pharmaceuticals Inc. | 9.55% | 25.51% | 1.17% | 11.07% | — | |
| Thermo Fisher Scientific Inc. | 9.41% | 2.28% | 4.96% | -1.78% | — | |
| Vertex Pharmaceuticals Inc. | 15.57% | 42.13% | 61.24% | 14.07% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 10.18% | 1.65% | 7.35% | 4.85% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 7.67% | 5.49% | 7.79% | 5.30% | — | |
Based on: 10-K (reporting date: 2025-12-31), 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).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= 105,208 – 43,438 = 61,770
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= 61,770 – 44,647 = 17,123
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 17,123 ÷ [(61,770 + 44,647) ÷ 2] = 32.18%
4 Click competitor name to see calculations.
The information presents a consistent increase in net operating assets over the four-year period, alongside a substantial rise in balance-sheet-based aggregate accruals. This leads to a progressively increasing balance-sheet-based accruals ratio, suggesting a growing reliance on accruals relative to cash flows in reporting net operating assets.
- Net Operating Assets
- Net operating assets demonstrate a strong upward trajectory, increasing from US$24,947 million in 2022 to US$61,770 million in 2025. This represents a cumulative increase of approximately 147.7% over the period. The growth appears to be accelerating, with larger absolute increases observed in later years.
- Balance-Sheet-Based Aggregate Accruals
- Balance-sheet-based aggregate accruals exhibit a significant increase, moving from US$2,726 million in 2022 to US$17,123 million in 2025. This represents a cumulative increase of over 528%. The increase in accruals is notably larger than the increase in net operating assets, particularly in the later years of the period.
- Balance-Sheet-Based Accruals Ratio
- The balance-sheet-based accruals ratio shows a clear upward trend, rising from 11.56% in 2022 to 32.18% in 2025. This indicates that a larger proportion of reported net operating assets is attributable to accruals rather than actual cash transactions. The ratio increased substantially from 2022 to 2023 (from 11.56% to 28.59%), and continued to increase, though at a slightly slower rate, in subsequent years. A ratio exceeding 30% warrants further investigation as it may signal potential concerns regarding the quality of earnings.
The observed trends suggest a growing dependence on accruals to recognize earnings. While increasing accruals are not inherently negative, the magnitude of the increase relative to net operating assets and the resulting accruals ratio necessitate further scrutiny to assess the sustainability of reported earnings and the potential for earnings manipulation.
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Cash-Flow-Statement-Based Accruals Ratio
Eli Lilly & Co., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net income | 20,640) | 10,590) | 5,240) | 6,245) | 5,582) | |
| Less: Net cash provided by operating activities | 16,813) | 8,818) | 4,240) | 7,084) | 7,261) | |
| Less: Net cash used for investing activities | (10,972) | (9,302) | (7,153) | (3,262) | (2,762) | |
| Cash-flow-statement-based aggregate accruals | 14,799) | 11,074) | 8,153) | 2,422) | 1,083) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 27.81% | 28.42% | 28.01% | 10.27% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| AbbVie Inc. | -13.17% | 10.32% | -24.89% | -16.25% | — | |
| Amgen Inc. | -0.56% | -11.16% | 52.47% | 8.81% | — | |
| Bristol-Myers Squibb Co. | -5.49% | -4.97% | -5.99% | -9.10% | — | |
| Danaher Corp. | -2.47% | -1.25% | 8.20% | 1.44% | — | |
| Gilead Sciences Inc. | 8.65% | -18.05% | -0.19% | -4.95% | — | |
| Johnson & Johnson | 26.80% | 10.58% | 13.66% | 10.78% | — | |
| Merck & Co. Inc. | 19.75% | 5.00% | 2.23% | 0.61% | — | |
| Pfizer Inc. | -1.91% | -5.24% | 19.96% | 18.46% | — | |
| Regeneron Pharmaceuticals Inc. | 0.64% | 12.04% | 14.35% | 18.61% | — | |
| Thermo Fisher Scientific Inc. | 3.71% | 4.71% | 3.80% | -0.06% | — | |
| Vertex Pharmaceuticals Inc. | 11.22% | 43.34% | 62.03% | -14.45% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 6.42% | 2.07% | 9.68% | 2.52% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 4.65% | 4.00% | 8.59% | 4.25% | — | |
Based on: 10-K (reporting date: 2025-12-31), 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).
1 2025 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 14,799 ÷ [(61,770 + 44,647) ÷ 2] = 27.81%
2 Click competitor name to see calculations.
Net operating assets exhibited consistent growth over the four-year period, increasing from US$24,947 million in 2022 to US$61,770 million in 2025. Concurrent with this growth, cash-flow-statement-based aggregate accruals also increased steadily, rising from US$2,422 million in 2022 to US$14,799 million in 2025.
- Cash-flow-statement-based Accruals Ratio
- The cash-flow-statement-based accruals ratio demonstrates a significant increase from 10.27% in 2022 to 28.01% in 2023. This represents a substantial rise in accruals relative to net operating assets. The ratio then stabilizes, fluctuating between 28.42% and 27.81% from 2023 through 2025. This sustained high level warrants further investigation as it suggests a considerable portion of reported earnings is reliant on non-cash accounting accruals.
The increasing trend in both aggregate accruals and the accruals ratio suggests a growing reliance on accruals to explain changes in net operating assets. While growth in accruals is not inherently negative, the magnitude of the increase and the consistently high accruals ratio over the latter three years may indicate potential areas of concern regarding the quality of reported earnings. Further analysis, including comparisons to industry peers and a review of the underlying drivers of these accruals, is recommended.
The stabilization of the accruals ratio between 2023 and 2025, despite continued growth in both accruals and net operating assets, could indicate a maturing accruals pattern as the company scales. However, the consistently elevated ratio still merits scrutiny to ensure accruals are reflective of genuine economic activity and not aggressive accounting practices.
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