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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Humana Inc. pages available for free this week:
- Income Statement
- Cash Flow Statement
- Analysis of Liquidity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Dividend Discount Model (DDM)
- Present Value of Free Cash Flow to Equity (FCFE)
- Return on Assets (ROA) since 2005
- Debt to Equity since 2005
- Price to Earnings (P/E) since 2005
- Analysis of Debt
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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 | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Investment securities | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Book overdraft | ||||||
| Less: Short-term debt | ||||||
| Less: Long-term debt | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Abbott Laboratories | ||||||
| CVS Health Corp. | ||||||
| Elevance Health Inc. | ||||||
| Intuitive Surgical Inc. | ||||||
| Medtronic PLC | ||||||
| UnitedHealth Group Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | ||||||
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
= – =
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= – =
3 2023 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.
The data reveals notable fluctuations in the financial reporting quality indicators over the four-year period examined.
- Net operating assets
- There was a significant increase from 3,481 million US dollars at the end of 2020 to 12,337 million in 2021. However, this was followed by a sharp decline to 7,852 million in 2022 and a further decrease to 7,007 million in 2023. This pattern suggests a peak in net operating assets in 2021, with subsequent contraction in the following two years.
- Balance-sheet-based aggregate accruals
- The aggregate accruals experienced dramatic volatility. Starting at 579 million US dollars in 2020, the figure surged markedly to 8,856 million in 2021. This was then followed by a reversal to a large negative value of -4,485 million in 2022, and a smaller negative figure of -845 million in 2023. The swing from highly positive to negative accruals indicates potential fluctuations in earnings management or changes in accounting judgments during this period.
- Balance-sheet-based accruals ratio
- Similarly, the accruals ratio displayed extreme variation. It rose from 18.14% in 2020 to an exceptionally high 111.97% in 2021, then dropped sharply to -44.43% in 2022 and further to -11.37% in 2023. Such large fluctuations in this ratio reflect inconsistent accrual accounting practices, which may impact the reliability and comparability of reported earnings over time.
Overall, the analysis highlights marked instability in key accrual measures after a substantial growth in net operating assets in 2021. The volatility observed in both aggregate accruals and their ratio suggests heightened earnings management or significant changes in accounting estimates that could affect the quality and predictability of earnings during the reported years.
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 | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash used in investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Abbott Laboratories | ||||||
| CVS Health Corp. | ||||||
| Elevance Health Inc. | ||||||
| Intuitive Surgical Inc. | ||||||
| Medtronic PLC | ||||||
| UnitedHealth Group Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | ||||||
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] =
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited a significant increase from 3,481 million USD in 2020 to a peak of 12,337 million USD in 2021. Following this peak, there was a noticeable decline to 7,852 million USD in 2022, with a further reduction to 7,007 million USD in 2023. This pattern indicates a sharp expansion in 2021, succeeded by a steady contraction over the next two years.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals experienced a considerable rise from 793 million USD in 2020 to 7,227 million USD in 2021, mirroring the trend in net operating assets. However, a pronounced reversal occurred in 2022, with aggregate accruals turning negative at -775 million USD, before increasing again to 2,000 million USD in 2023. This volatility suggests fluctuating accrual accounting adjustments within the periods analyzed.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio closely followed the movements seen in aggregate accruals. It started at 24.85% in 2020, surged sharply to 91.38% in 2021, reflecting a high level of accrual relative to cash flows. In 2022, the ratio reversed significantly to -7.68%, indicating negative accruals, before climbing back to 26.92% in 2023. Such fluctuations may reflect variations in earnings quality and potential changes in accounting policies or operational performance.