Microsoft Excel LibreOffice Calc

Johnson & Johnson (JNJ)


Financial Reporting Quality: Aggregate Accruals

Difficulty: Advanced

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

Johnson & Johnson, balance sheet computation of aggregate accruals

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 30, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 28, 2014
Operating Assets
Total assets 152,954  157,303  141,208  133,411  131,119 
Less: Cash and cash equivalents 18,107  17,824  18,972  13,732  14,523 
Less: Marketable securities 1,580  472  22,935  24,644  18,566 
Operating assets 133,267  139,007  99,301  95,035  98,030 
Operating Liabilities
Total liabilities 93,202  97,143  70,790  62,261  61,367 
Less: Loans and notes payable 2,796  3,906  4,684  7,004  3,638 
Less: Long-term debt, excluding current portion 27,684  30,675  22,442  12,857  15,122 
Operating liabilities 62,722  62,562  43,664  42,400  42,607 
Net operating assets1 70,545  76,445  55,637  52,635  55,423 
Balance-sheet-based aggregate accruals2 (5,900) 20,808  3,002  (2,788)
Ratio
Balance-sheet-based accruals ratio3 -8.03% 31.51% 5.55% -5.16%
Benchmarks
Balance-Sheet-Based Accruals Ratio, Competitors
Abbott Laboratories -6.71% 69.42% -1.06% -3.34%
AbbVie Inc. -31.42% -7.02% 25.20% 105.82%
Allergan PLC -11.32% 1.78% -21.00% 92.17%
Amgen Inc. -9.88% -33.04% -6.85% -4.19%
Biogen Inc. 3.85% 7.67% 9.75% 26.50%
Bristol-Myers Squibb Co. -3.17% -24.97% -0.82% 9.08%
Celgene Corp. 62.19% -18.63% -5.27% 79.80%
Eli Lilly & Co. -10.27% -5.99% 1.26% -2.72%
Gilead Sciences Inc. -41.29% -16.94% 23.56% 38.29%
Merck & Co. Inc. -15.70% -0.65% -12.97% 6.02%
Pfizer Inc. -9.34% 12.36% 4.12% 11.13%
Regeneron Pharmaceuticals Inc. 20.14% 33.15% 26.37% 34.77%
Balance-Sheet-Based Accruals Ratio, Sector
Pharmaceuticals & Biotechnology -9.53% 8.00% -1.83% 29.02%
Balance-Sheet-Based Accruals Ratio, Industry
Health Care -1.89% 7.94% 0.81% 35.33%

Based on: 10-K (filing date: 2019-02-20), 10-K (filing date: 2018-02-21), 10-K (filing date: 2017-02-27), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-24).

2018 Calculations

1 Net operating assets = Operating assets – Operating liabilities
= 133,26762,722 = 70,545

2 Balance-sheet-based aggregate accruals = Net operating assets 2018 – Net operating assets 2017
= 70,54576,445 = -5,900

3 Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -5,900 ÷ [(70,545 + 76,445) ÷ 2] = -8.03%

Ratio Description The company
Balance-sheet-based accruals ratio Ratio is found by dividing balance-sheet-based aggregate accruals by average net operating assets. Using the balance-sheet-based accruals ratio, Johnson & Johnson improved earnings quality from 2017 to 2018.

Cash-Flow-Statement-Based Accruals Ratio

Johnson & Johnson, cash flow statement computation of aggregate accruals

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 30, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 28, 2014
Net earnings 15,297  1,300  16,540  15,409  16,323 
Less: Net cash flows from operating activities 22,201  21,056  18,767  19,279  18,471 
Less: Net cash used by investing activities (3,167) (14,868) (4,761) (7,735) (12,305)
Cash-flow-statement-based aggregate accruals (3,737) (4,888) 2,534  3,865  10,157 
Ratio
Cash-flow-statement-based accruals ratio1 -5.08% -7.40% 4.68% 7.15%
Benchmarks
Cash-Flow-Statement-Based Accruals Ratio, Competitors
Abbott Laboratories -5.39% 12.34% -6.46% 4.27%
AbbVie Inc. -23.85% -12.92% 16.02% 59.26%
Allergan PLC -15.00% -9.44% -10.08% 45.11%
Amgen Inc. -95.70% -22.85% 22.06% 11.81%
Biogen Inc. 1.91% 6.65% 12.70% 39.81%
Bristol-Myers Squibb Co. -1.14% -28.29% 0.76% 8.10%
Celgene Corp. 34.03% 4.95% -7.35% 55.24%
Eli Lilly & Co. -25.54% -11.43% 5.63% -2.13%
Gilead Sciences Inc. -73.15% 28.23% 29.15% 45.78%
Merck & Co. Inc. -19.26% -13.29% -5.97% -5.73%
Pfizer Inc. -10.12% 10.69% -1.06% -5.98%
Regeneron Pharmaceuticals Inc. 28.32% 19.22% 13.64% 8.37%
Cash-Flow-Statement-Based Accruals Ratio, Sector
Pharmaceuticals & Biotechnology -15.74% -2.28% 1.73% 16.40%
Cash-Flow-Statement-Based Accruals Ratio, Industry
Health Care -8.00% -0.19% 2.89% 18.47%

Based on: 10-K (filing date: 2019-02-20), 10-K (filing date: 2018-02-21), 10-K (filing date: 2017-02-27), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-24).

2018 Calculations

1 Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -3,737 ÷ [(70,545 + 76,445) ÷ 2] = -5.08%

Ratio Description The company
Cash-flow-statement-based accruals ratio Ratio is found by dividing cash-flow-statement-based aggregate accruals by average net operating assets. Using the cash-flow-statement-based accruals ratio, Johnson & Johnson improved earnings quality from 2017 to 2018.