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
HCA Healthcare Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 50,742) | 47,490) | 45,058) | 39,207) | 36,593) | |
| Less: Cash and cash equivalents | 1,451) | 1,793) | 621) | 502) | 732) | |
| Operating assets | 49,291) | 45,697) | 44,437) | 38,705) | 35,861) | |
| Operating Liabilities | ||||||
| Total liabilities | 49,253) | 44,598) | 45,623) | 42,125) | 41,588) | |
| Less: Long-term debt due within one year | 237) | 209) | 145) | 788) | 200) | |
| Less: Long-term debt due after one year, less debt issuance costs and discounts | 34,342) | 30,795) | 33,577) | 32,033) | 32,858) | |
| Operating liabilities | 14,674) | 13,594) | 11,901) | 9,304) | 8,530) | |
| Net operating assets1 | 34,617) | 32,103) | 32,536) | 29,401) | 27,331) | |
| Balance-sheet-based aggregate accruals2 | 2,514) | (433) | 3,135) | 2,070) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 7.54% | -1.34% | 10.12% | 7.30% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Abbott Laboratories | — | — | — | — | — | |
| Elevance Health Inc. | — | — | — | — | — | |
| Intuitive Surgical Inc. | — | — | — | — | — | |
| Medtronic PLC | — | — | — | — | — | |
| UnitedHealth Group Inc. | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 200.00% | — | — | — | — | |
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= 49,291 – 14,674 = 34,617
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= 34,617 – 32,103 = 2,514
3 2021 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,514 ÷ [(34,617 + 32,103) ÷ 2] = 7.54%
4 Click competitor name to see calculations.
The analysis of financial reporting quality from 2018 to 2021 reveals a period of substantial volatility in accrual levels relative to the operating asset base. While the scale of operations expanded over the four-year period, the relationship between accrual-based earnings and cash flows shifted significantly, particularly during the 2020 fiscal year.
- Net Operating Assets Trend
- A general upward trajectory is observed in net operating assets, which grew from US$ 29,401 million in 2018 to US$ 34,617 million in 2021. A marginal decline occurred in 2020, where assets shifted to US$ 32,103 million, but the overall trend reflects a net expansion of the resources deployed in operations.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals exhibited significant fluctuations. Accruals increased from US$ 2,070 million in 2018 to a peak of US$ 3,135 million in 2019, before experiencing a sharp reversal to a negative value of US$ -433 million in 2020. This negative figure indicates a period where cash flows exceeded accrual-based operating income. By 2021, aggregate accruals recovered to US$ 2,514 million.
- Accruals Ratio Interpretation
- The balance-sheet-based accruals ratio mirrors the volatility seen in aggregate accruals. The ratio rose from 7.30% in 2018 to 10.12% in 2019, indicating a higher proportion of non-cash earnings relative to assets. The subsequent drop to -1.34% in 2020 represents a distinct deviation, signifying a temporary shift in the quality of earnings or a convergence of reporting with cash realization. The ratio returned to 7.54% in 2021, suggesting a return to the baseline levels observed at the start of the period.
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Cash-Flow-Statement-Based Accruals Ratio
HCA Healthcare Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income attributable to HCA Healthcare, Inc. | 6,956) | 3,754) | 3,505) | 3,787) | 2,216) | |
| Less: Net cash provided by operating activities | 8,959) | 9,232) | 7,602) | 6,761) | 5,426) | |
| Less: Net cash used in investing activities | (2,643) | (3,393) | (5,720) | (3,901) | (4,279) | |
| Cash-flow-statement-based aggregate accruals | 640) | (2,085) | 1,623) | 927) | 1,069) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 1.92% | -6.45% | 5.24% | 3.27% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Abbott Laboratories | — | — | — | — | — | |
| Elevance Health Inc. | — | — | — | — | — | |
| Intuitive Surgical Inc. | — | — | — | — | — | |
| Medtronic PLC | — | — | — | — | — | |
| UnitedHealth Group Inc. | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 11.34% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 14.62% | — | — | — | — | |
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 640 ÷ [(34,617 + 32,103) ÷ 2] = 1.92%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality reveals significant fluctuations in the relationship between accounting earnings and cash flows from 2018 to 2021. While the overall asset base expanded, the accruals ratio exhibited substantial volatility, specifically during the 2020 fiscal year.
- Net Operating Assets Trend
- Net operating assets demonstrated a general upward trajectory, increasing from US$ 29,401 million in 2018 to US$ 34,617 million by 2021. A marginal contraction occurred in 2020, where assets decreased to US$ 32,103 million, before resuming growth in the subsequent period.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals showed an inconsistent pattern. Values rose from US$ 927 million in 2018 to a peak of US$ 1,623 million in 2019, followed by a sharp reversal to a negative US$ 2,085 million in 2020. By 2021, these accruals returned to a positive position of US$ 640 million.
- Accruals Ratio Analysis
- The accruals ratio mirrored the volatility of the aggregate accruals, moving from 3.27% in 2018 to 5.24% in 2019. A significant divergence occurred in 2020, with the ratio falling to -6.45%, indicating a period where cash flow exceeded accounting earnings. The ratio returned to a positive value of 1.92% in 2021, suggesting a stabilization in the alignment between reported earnings and cash generation relative to the company's operating asset base.
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