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
Humana Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 47,065) | 43,055) | 44,358) | 34,969) | 29,074) | |
| Less: Cash and cash equivalents | 4,694) | 5,061) | 3,394) | 4,673) | 4,054) | |
| Less: Investment securities | 16,626) | 13,881) | 13,192) | 12,554) | 10,972) | |
| Operating assets | 25,745) | 24,113) | 27,772) | 17,742) | 14,048) | |
| Operating Liabilities | ||||||
| Total liabilities | 30,747) | 27,685) | 28,255) | 21,241) | 17,037) | |
| Less: Book overdraft | 353) | 298) | 326) | 320) | 225) | |
| Less: Short-term debt | 1,443) | 2,092) | 1,953) | 600) | 699) | |
| Less: Long-term debt | 10,213) | 9,034) | 10,541) | 6,060) | 4,967) | |
| Operating liabilities | 18,738) | 16,261) | 15,435) | 14,261) | 11,146) | |
| Net operating assets1 | 7,007) | 7,852) | 12,337) | 3,481) | 2,902) | |
| Balance-sheet-based aggregate accruals2 | (845) | (4,485) | 8,856) | 579) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -11.37% | -44.43% | 111.97% | 18.14% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Abbott Laboratories | 6.06% | -0.73% | — | — | — | |
| Elevance Health Inc. | 7.14% | 0.32% | — | — | — | |
| Intuitive Surgical Inc. | 15.55% | -10.21% | — | — | — | |
| Medtronic PLC | 2.69% | -1.37% | — | — | — | |
| UnitedHealth Group Inc. | 13.41% | 17.32% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 8.90% | 6.46% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 7.79% | 5.30% | 200.00% | — | — | |
Based on: 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), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 25,745 – 18,738 = 7,007
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 7,007 – 7,852 = -845
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -845 ÷ [(7,007 + 7,852) ÷ 2] = -11.37%
4 Click competitor name to see calculations.
The analysis of financial reporting quality between 2020 and 2023 reveals significant volatility in accrual levels and net operating assets. A period of aggressive growth in asset bases and accruals peaked in 2021, followed by a sharp reversal into negative territory in 2022 and a partial recovery toward the end of 2023.
- Net Operating Assets Trend
- Net operating assets experienced a substantial increase from 3,481 million USD in 2020 to a peak of 12,337 million USD in 2021. This expansion was followed by a contraction over the next two years, with values descending to 7,852 million USD in 2022 and further declining to 7,007 million USD by December 31, 2023.
- Balance-Sheet-Based Aggregate Accruals
- Aggregate accruals exhibited extreme fluctuations during the observed period. After a relatively low base of 579 million USD in 2020, accruals surged to 8,856 million USD in 2021. This was followed by a dramatic shift to negative accruals, reaching -4,485 million USD in 2022, before moderating to -845 million USD in 2023. This transition from high positive to negative accruals suggests a significant shift in the composition of earnings relative to cash flows.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio reflects the aforementioned volatility with high precision. The ratio rose from 18.14% in 2020 to an extreme peak of 111.97% in 2021, indicating that accruals represented a vast majority of net operating assets during that period. The subsequent plunge to -44.43% in 2022 and -11.37% in 2023 marks a reversal in reporting quality dynamics, where the negative ratio indicates that cash flows exceeded accrual-based accounting earnings.
Overall, the data indicates a period of high instability in accrual-based reporting. The sharp peak in 2021 followed by deep negative values in 2022 suggests a cycle of rapid asset recognition followed by significant adjustments or cash-intensive operating phases.
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Cash-Flow-Statement-Based Accruals Ratio
Humana Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Humana | 2,489) | 2,806) | 2,933) | 3,367) | 2,707) | |
| Less: Net cash provided by operating activities | 3,981) | 4,587) | 2,262) | 5,639) | 5,284) | |
| Less: Net cash used in investing activities | (3,492) | (1,006) | (6,556) | (3,065) | (1,278) | |
| Cash-flow-statement-based aggregate accruals | 2,000) | (775) | 7,227) | 793) | (1,299) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 26.92% | -7.68% | 91.38% | 24.85% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Abbott Laboratories | 3.55% | -2.08% | — | — | — | |
| Elevance Health Inc. | 12.87% | 8.35% | — | — | — | |
| Intuitive Surgical Inc. | 4.54% | -20.88% | — | — | — | |
| Medtronic PLC | 1.80% | -0.97% | — | — | — | |
| UnitedHealth Group Inc. | 7.40% | 21.73% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 5.82% | 8.70% | 11.34% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 8.59% | 4.25% | 14.62% | — | — | |
Based on: 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), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,000 ÷ [(7,007 + 7,852) ÷ 2] = 26.92%
2 Click competitor name to see calculations.
An analysis of the cash-flow-statement-based accruals indicates significant volatility in the relationship between accrual-based earnings and actual cash flows from 2020 through 2023. The fluctuations in the accruals ratio suggest a variable degree of earnings quality over this period, characterized by a substantial peak in 2021 followed by a sharp correction in 2022.
- Net Operating Assets (NOA)
- Net operating assets exhibited a sharp increase from US$ 3,481 million in 2020 to a peak of US$ 12,337 million in 2021. Following this peak, a downward trend was observed, with assets declining to US$ 7,852 million in 2022 and further to US$ 7,007 million by the end of 2023.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals showed extreme variance, rising from US$ 793 million in 2020 to US$ 7,227 million in 2021. This was followed by a reversal into negative territory in 2022, reaching -US$ 775 million, before returning to a positive balance of US$ 2,000 million in 2023.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrored the volatility of the aggregate accruals. The ratio expanded from 24.85% in 2020 to a high of 91.38% in 2021, indicating that a very high proportion of the reported earnings during that period were not supported by cash flows. A significant contraction occurred in 2022, where the ratio fell to -7.68%, suggesting that cash flows exceeded accrual-based earnings. By 2023, the ratio stabilized at 26.92%, returning to a level comparable to the 2020 baseline.
The correlation between the spike in net operating assets and the surge in the accruals ratio in 2021 suggests a period of significant non-cash growth or asset accumulation. The subsequent shift to a negative ratio in 2022 reflects a period of cash realization or a reduction in accrued assets, which served to normalize the reporting quality moving into 2023.
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