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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- Statement of Comprehensive Income
- Common-Size Income Statement
- Analysis of Reportable Segments
- Price to FCFE (P/FCFE)
- Capital Asset Pricing Model (CAPM)
- Present Value of Free Cash Flow to Equity (FCFE)
- Return on Assets (ROA) since 2005
- Debt to Equity since 2005
- Price to Book Value (P/BV) since 2005
- Analysis of Revenues
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Balance-Sheet-Based Accruals Ratio
Kellanova, balance sheet computation of aggregate accruals
US$ in millions
| Dec 30, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 28, 2019 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current maturities of long-term debt | ||||||
| Less: Notes payable | ||||||
| Less: Long-term debt, excluding current maturities | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Coca-Cola Co. | ||||||
| Mondelēz International Inc. | ||||||
| PepsiCo Inc. | ||||||
| Philip Morris International Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Food, Beverage & Tobacco | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | ||||||
Based on: 10-K (reporting date: 2023-12-30), 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: 2019-12-28).
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.
- Net Operating Assets
- The net operating assets demonstrate a fluctuating yet overall declining trend over the analyzed periods. Starting at 10,676 million US dollars as of December 31, 2020, there is a slight increase to 11,040 million in 2021. Subsequently, the figure decreases to 10,640 million in 2022, followed by a more pronounced decline to 8,968 million by the end of 2023. This downward trend in the later years suggests a reduction in the net resources deployed in operations.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals show significant volatility across the periods. In 2020, the balance is negative at -163 million, indicating possible conservative accounting or lower accrued expenses. This shifts markedly to a positive 364 million in 2021, implying an increase in accruals, perhaps due to higher accrued revenues or expenses recognized. The accruals revert to a negative -400 million in 2022, reflecting a decrease or reversal in accrued amounts. By 2023, there is a notable increase in the negative value to -1,672 million, which may imply substantial adjustments or write-backs impacting earnings quality.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrors the trends in aggregate accruals but also highlights growing magnitude and volatility. The ratio starts at -1.52% in 2020, indicating a small proportion of accruals relative to net operating assets. It then rises to 3.35% in 2021, reflecting an increase in accruals relative to operating assets. Subsequently, the ratio drops sharply to -3.69% in 2022 and experiences a dramatic decline to -17.05% in 2023. The increasing negative ratio in the final year may indicate worsening quality of financial reporting, with potentially significant accruals detracting from cash earnings and possibly signaling aggressive accounting practices or challenging operational conditions.
- Summary
- Overall, the data reflect a decline in net operating assets alongside considerable fluctuation in balance-sheet-based accruals and their relative ratio. The pronounced increase in negative accruals and the steep decline in the accrual ratio by 2023 suggest potential concerns regarding earnings quality and financial reporting consistency. These patterns warrant further investigation to understand the underlying drivers and their implications for financial performance and risk.
Cash-Flow-Statement-Based Accruals Ratio
Kellanova, cash flow statement computation of aggregate accruals
US$ in millions
| Dec 30, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 28, 2019 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Kellanova | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash (used in) provided by investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Coca-Cola Co. | ||||||
| Mondelēz International Inc. | ||||||
| PepsiCo Inc. | ||||||
| Philip Morris International Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Food, Beverage & Tobacco | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | ||||||
Based on: 10-K (reporting date: 2023-12-30), 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: 2019-12-28).
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.
The analysis of the annual financial reporting quality measure data over the four-year period reveals the following trends and insights:
- Net Operating Assets
- The net operating assets show a fluctuating but generally declining trend across the period. Starting at 10,676 million USD in 2020, there was a slight increase in 2021 to 11,040 million USD, followed by a decrease to 10,640 million USD in 2022. The figure sharply declined to 8,968 million USD in 2023, representing the lowest value in the dataset. This reduction in net operating assets may indicate a contraction in the company's operational asset base or a strategic divestiture of assets.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals exhibit volatility throughout the observed years. In 2020, the aggregate accruals were negative at -150 million USD, suggesting more cash than accrual-based earnings. There was a significant positive swing in 2021 with accruals at 315 million USD, indicating an increase in non-cash earnings components relative to cash flows. The amount reversed again in 2022 and 2023, registering negative values at -243 million USD and -132 million USD, respectively. This pattern suggests fluctuating earnings quality as reflected through the accruals component.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrors the aggregate accruals trend with notable fluctuations. The ratio was negative in 2020 (-1.39%), indicating net cash flows exceeding accrual earnings. It rose to a positive 2.9% in 2021, reflecting an increase in accruals relative to cash flow, which could imply higher earnings management or other accounting adjustments. Subsequently, the ratio reverted to negative values in both 2022 (-2.24%) and 2023 (-1.35%), indicating a return to periods where cash flows dominate accrual earnings. The oscillation between positive and negative values suggests variability in the quality and composition of earnings over time.
Overall, the data points to a declining trend in net operating assets accompanied by significant volatility in accrual-based measures. This may reflect changing operational conditions and fluctuating financial reporting quality. The negative accruals ratios in recent years could be indicative of stronger cash-based earnings but should be examined in the context of other financial metrics for a comprehensive assessment.