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
Hershey Co., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 10,948,820) | 10,412,231) | 9,131,845) | 8,140,395) | 7,703,020) | |
| Less: Cash and cash equivalents | 463,889) | 329,266) | 1,143,987) | 493,262) | 587,998) | |
| Operating assets | 10,484,931) | 10,082,965) | 7,987,858) | 7,647,133) | 7,115,022) | |
| Operating Liabilities | ||||||
| Total liabilities | 7,649,276) | 7,655,002) | 6,893,962) | 6,395,401) | 6,295,754) | |
| Less: Short-term debt | 693,790) | 939,423) | 74,041) | 32,282) | 1,197,929) | |
| Less: Current portion of long-term debt | 753,578) | 2,844) | 438,829) | 703,390) | 5,387) | |
| Less: Long-term portion of long-term debt | 3,343,977) | 4,086,627) | 4,089,755) | 3,530,813) | 3,254,280) | |
| Operating liabilities | 2,857,931) | 2,626,108) | 2,291,337) | 2,128,916) | 1,838,158) | |
| Net operating assets1 | 7,627,000) | 7,456,857) | 5,696,521) | 5,518,217) | 5,276,864) | |
| Balance-sheet-based aggregate accruals2 | 170,143) | 1,760,336) | 178,304) | 241,353) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 2.26% | 26.77% | 3.18% | 4.47% | — | |
| 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: 2022-12-31), 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).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 10,484,931 – 2,857,931 = 7,627,000
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 7,627,000 – 7,456,857 = 170,143
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 170,143 ÷ [(7,627,000 + 7,456,857) ÷ 2] = 2.26%
4 Click competitor name to see calculations.
The analysis of financial reporting quality between 2019 and 2022 reveals a period of general stability characterized by a significant, transient anomaly in 2021. While the scale of operations expanded steadily, the relationship between reported earnings and cash flows experienced a sharp divergence during a single fiscal year before returning to baseline levels.
- Net Operating Assets
- A consistent growth trend is observed in net operating assets, which increased from US$ 5,518,217 thousand in 2019 to US$ 7,627,000 thousand in 2022. The most substantial expansion occurred between 2020 and 2021, where assets grew by approximately 31%, indicating a significant increase in the company's operational investment or asset base during that window.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals remained relatively low and stable in 2019, 2020, and 2022, fluctuating between US$ 170 million and US$ 241 million. However, 2021 serves as a significant outlier, with accruals spiking to US$ 1,760,336 thousand. This represents a nearly ten-fold increase over the subsequent 2022 figure, suggesting a temporary and substantial accumulation of non-cash earnings or a significant shift in working capital timing.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio demonstrates a pattern of high earnings quality for the majority of the period, with ratios of 4.47% in 2019, 3.18% in 2020, and a period-low of 2.26% in 2022. These low percentages suggest that earnings were closely aligned with cash flows. The sharp increase to 26.77% in 2021 indicates a temporary degradation in reporting quality or an extraordinary accounting event. The subsequent decline to 2.26% in 2022 confirms a rapid normalization of the ratio, bringing the accruals-to-assets relationship back to a conservative level.
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Cash-Flow-Statement-Based Accruals Ratio
Hershey Co., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income attributable to The Hershey Company | 1,644,817) | 1,477,512) | 1,278,708) | 1,149,692) | 1,177,562) | |
| Less: Net cash provided by operating activities | 2,327,837) | 2,082,884) | 1,699,657) | 1,763,873) | 1,599,993) | |
| Less: Net cash used in investing activities | (787,376) | (2,222,828) | (531,280) | (780,480) | (1,502,894) | |
| Cash-flow-statement-based aggregate accruals | 104,356) | 1,617,456) | 110,331) | 166,299) | 1,080,463) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 1.38% | 24.59% | 1.97% | 3.08% | — | |
| 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: 2022-12-31), 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).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 104,356 ÷ [(7,627,000 + 7,456,857) ÷ 2] = 1.38%
2 Click competitor name to see calculations.
An examination of financial reporting quality reveals a period of relative stability interrupted by a significant anomaly in 2021. The relationship between net operating assets and cash-flow-statement-based accruals indicates a transitory spike in non-cash earnings components during that fiscal year, followed by a return to historical norms.
- Net Operating Assets Trend
- Net operating assets exhibited a consistent upward trajectory from 2019 to 2022. A notable increase occurred between December 31, 2020, and December 31, 2021, where assets rose from US$ 5,696,521 thousand to US$ 7,456,857 thousand, representing a substantial expansion of the operating base.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals remained low and stable in 2019 and 2020, totaling US$ 166,299 thousand and US$ 110,331 thousand, respectively. However, 2021 saw an exceptional increase to US$ 1,617,456 thousand. This spike was short-lived, as the value reverted to US$ 104,356 thousand by December 31, 2022, suggesting that the 2021 figures were driven by non-recurring items or temporary timing differences.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, which measures the proportion of earnings not backed by cash flows relative to net operating assets, followed a similar pattern to aggregate accruals. The ratio remained low at 3.08% in 2019 and 1.97% in 2020, before surging to 24.59% in 2021. This sharp increase indicates a temporary divergence between accounting earnings and cash flow for that period. The subsequent decline to 1.38% in 2022 indicates a normalization of reporting quality and a strengthened alignment between reported accruals and cash flow.
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