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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Balance-Sheet-Based Accruals Ratio
Stryker Corp., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Marketable securities | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Current maturities of debt | ||||||
| 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 | ||||||
| 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: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= – =
3 2021 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 demonstrated a general upward trend over the analyzed period, starting at 17,890 million US dollars in 2018 and increasing steadily each year to reach 24,337 million US dollars in 2021. This indicates a growth in the company’s operating asset base, with significant growth observed between 2019 and 2020.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals fluctuated noticeably during the period. They began at 3,481 million US dollars in 2018 and dropped sharply to 1,582 million US dollars in 2019. This was followed by a substantial increase to 4,579 million US dollars in 2020, then a significant decline to 286 million US dollars in 2021. These variations suggest volatility in the company’s accrual accounting practices or changes in operating conditions that affected accrual amounts.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, representing accruals relative to net operating assets, mirrored the fluctuations seen in aggregate accruals with more pronounced changes. It started at 21.55% in 2018, dropped markedly to 8.47% in 2019, surged back to 21.04% in 2020, and then plummeted to a very low level of 1.18% in 2021. This trend indicates a decrease in accrual-based earnings components proportionate to operating assets by the end of the period, suggesting a potential improvement in earnings quality or a shift toward more cash-based earnings.
Cash-Flow-Statement-Based Accruals Ratio
Stryker Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net earnings | ||||||
| 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: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 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 showed a consistent upward trend from 2018 to 2021. Beginning at $17,890 million in 2018, the figure rose to $19,472 million in 2019, then experienced a steeper increase to $24,051 million in 2020, and finally slightly increased to $24,337 million in 2021. This progression indicates an expansion in the company's operational asset base over the four years.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals exhibited a notable fluctuation over the period. Starting from $3,800 million in 2018, there was a sharp decline in 2019 to $1,347 million. The figure then rebounded significantly in 2020 to $3,023 million, before dropping to a negative value of -$410 million in 2021. This reversal into negative accruals in the most recent year suggests a change in the accrual patterns that may impact earnings quality or cash flow timing.
- Cash-Flow-Statement-Based Accruals Ratio (%)
- The accruals ratio followed a pattern similar to aggregate accruals, showing a marked decline from 23.53% in 2018 to 7.21% in 2019. It then increased to 13.89% in 2020, before turning negative to -1.69% in 2021. The negative ratio in 2021 could indicate a scenario where cash-based measures of performance outpaced accrual-based components, potentially reflecting improvements in cash flow quality or other financial management strategies.