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
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 | 15,621) | 18,496) | 18,178) | 17,996) | 17,564) | |
| Less: Cash and cash equivalents | 274) | 299) | 286) | 435) | 397) | |
| Operating assets | 15,347) | 18,197) | 17,892) | 17,561) | 17,167) | |
| Operating Liabilities | ||||||
| Total liabilities | 12,252) | 14,121) | 13,963) | 14,360) | 14,250) | |
| Less: Current maturities of long-term debt | 663) | 780) | 712) | 627) | 620) | |
| Less: Notes payable | 121) | 467) | 137) | 102) | 107) | |
| Less: Long-term debt, excluding current maturities | 5,089) | 5,317) | 6,262) | 6,746) | 7,195) | |
| Operating liabilities | 6,379) | 7,557) | 6,852) | 6,885) | 6,328) | |
| Net operating assets1 | 8,968) | 10,640) | 11,040) | 10,676) | 10,839) | |
| Balance-sheet-based aggregate accruals2 | (1,672) | (400) | 364) | (163) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -17.05% | -3.69% | 3.35% | -1.52% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Coca-Cola Co. | 4.65% | -3.05% | — | — | — | |
| Mondelēz International Inc. | -4.19% | 7.90% | — | — | — | |
| PepsiCo Inc. | 3.36% | 0.98% | — | — | — | |
| Philip Morris International Inc. | 5.21% | 75.98% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Food, Beverage & Tobacco | 2.19% | 11.97% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | 2.58% | 7.61% | 200.00% | — | — | |
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
= 15,347 – 6,379 = 8,968
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 8,968 – 10,640 = -1,672
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -1,672 ÷ [(8,968 + 10,640) ÷ 2] = -17.05%
4 Click competitor name to see calculations.
The financial reporting quality, as measured by the balance-sheet-based accruals ratio, exhibits significant volatility and a pronounced downward shift between 2020 and 2023. While the ratio remained within a relatively narrow range from 2020 to 2022, a substantial divergence occurred in 2023, indicating a significant change in the relationship between reported earnings and the underlying asset base.
- Net Operating Assets Trend
- Net operating assets remained relatively stable between 2020 and 2022, peaking at 11,040 million in 2021. However, a notable contraction is observed by December 30, 2023, where net operating assets decreased to 8,968 million, representing a decline of approximately 15.7% compared to the previous year.
- Aggregate Accruals Analysis
- Balance-sheet-based aggregate accruals fluctuated from -163 million in 2020 to a positive 364 million in 2021, before reverting to negative values. A sharp acceleration in negative accruals is evident in 2023, with the value dropping to -1,672 million. This suggests a period where cash-based results significantly exceeded accrual-based accounting measures.
- Accruals Ratio Interpretation
- The accruals ratio moved from -1.52% in 2020 to 3.35% in 2021, followed by a decline to -3.69% in 2022. The trend culminated in a steep drop to -17.05% in 2023. Such a substantial negative ratio typically indicates high earnings quality or conservative accounting, as it implies that reported earnings are considerably lower than the actual cash generated, or that significant non-cash write-downs have occurred, reducing the asset base without an equivalent cash outflow.
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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 | 951) | 960) | 1,488) | 1,251) | 960) | |
| Less: Net cash provided by operating activities | 1,645) | 1,651) | 1,701) | 1,986) | 1,176) | |
| Less: Net cash (used in) provided by investing activities | (562) | (448) | (528) | (585) | 774) | |
| Cash-flow-statement-based aggregate accruals | (132) | (243) | 315) | (150) | (990) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -1.35% | -2.24% | 2.90% | -1.39% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Coca-Cola Co. | 4.51% | -1.32% | — | — | — | |
| Mondelēz International Inc. | -5.47% | 8.02% | — | — | — | |
| PepsiCo Inc. | 2.17% | 1.04% | — | — | — | |
| Philip Morris International Inc. | 6.40% | 57.17% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Food, Beverage & Tobacco | 1.72% | 9.94% | -1.37% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | 2.27% | 4.81% | -9.79% | — | — | |
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 × -132 ÷ [(8,968 + 10,640) ÷ 2] = -1.35%
2 Click competitor name to see calculations.
The analysis of financial reporting quality reveals a period of volatility in aggregate accruals, characterized by a significant fluctuation in 2021 followed by a return to negative accrual values. Net operating assets remained relatively stable from 2020 through 2022, before experiencing a notable contraction in 2023.
- Net Operating Assets Trend
- Net operating assets exhibited a slight increase from 10,676 million USD in 2020 to a peak of 11,040 million USD in 2021. This was followed by a gradual decline to 10,640 million USD in 2022 and a more pronounced decrease to 8,968 million USD by December 30, 2023. The reduction in the final year indicates a contraction in the asset base utilized in operations.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals showed inconsistent movement over the four-year period. After starting at -150 million USD in 2020, there was a sharp reversal to a positive 315 million USD in 2021. This positive trend was short-lived, as accruals returned to negative territory in 2022 (-243 million USD) and 2023 (-132 million USD).
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrors the behavior of the aggregate accruals, fluctuating between -1.39% in 2020 and 2.90% in 2021. A peak in the ratio occurred in 2021, representing the only period in the series where accrual-based earnings exceeded cash flows. The subsequent decline to -2.24% in 2022 and -1.35% in 2023 suggests a return to a more conservative reporting posture, where cash flow consistently exceeds accrual-based reporting.
Overall, the predominance of negative accrual ratios across three of the four analyzed years indicates a general trend of high earnings quality, as the reported earnings are well-supported by operating cash flows. The deviation observed in 2021 appears to be an isolated occurrence rather than a sustained shift in reporting quality.
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