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
Thermo Fisher Scientific Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 110,343) | 97,321) | 98,726) | 97,154) | 95,123) | |
| Less: Cash and cash equivalents | 9,852) | 4,009) | 8,077) | 8,524) | 4,477) | |
| Less: Short-term investments | 253) | 1,561) | 3) | —) | —) | |
| Operating assets | 100,238) | 91,751) | 90,646) | 88,630) | 90,646) | |
| Operating Liabilities | ||||||
| Total liabilities | 56,806) | 47,650) | 51,884) | 53,006) | 54,146) | |
| Less: Short-term obligations and current maturities of long-term obligations | 3,533) | 2,214) | 3,609) | 5,579) | 2,537) | |
| Less: Long-term obligations, excluding current maturities | 35,852) | 29,061) | 31,308) | 28,909) | 32,333) | |
| Operating liabilities | 17,421) | 16,375) | 16,967) | 18,518) | 19,276) | |
| Net operating assets1 | 82,817) | 75,376) | 73,679) | 70,112) | 71,370) | |
| Balance-sheet-based aggregate accruals2 | 7,441) | 1,697) | 3,567) | (1,258) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 9.41% | 2.28% | 4.96% | -1.78% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| AbbVie Inc. | -9.59% | 13.10% | -22.39% | -14.27% | — | |
| Amgen Inc. | 0.24% | -10.36% | 57.08% | 4.07% | — | |
| Bristol-Myers Squibb Co. | -4.13% | -3.21% | -7.12% | -3.86% | — | |
| Danaher Corp. | 4.42% | -3.94% | 3.48% | -1.55% | — | |
| Eli Lilly & Co. | 32.18% | 29.20% | 28.59% | 11.56% | — | |
| Gilead Sciences Inc. | 10.43% | -11.79% | 1.04% | -2.92% | — | |
| Johnson & Johnson | 26.71% | 10.61% | -21.13% | 19.84% | — | |
| Merck & Co. Inc. | 22.44% | 6.20% | 3.16% | 0.46% | — | |
| Pfizer Inc. | 4.15% | -11.48% | 30.66% | 24.95% | — | |
| Regeneron Pharmaceuticals Inc. | 9.55% | 25.51% | 1.17% | 11.07% | — | |
| Vertex Pharmaceuticals Inc. | 15.57% | 42.13% | 61.24% | 14.07% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 10.18% | 1.65% | 7.35% | 4.85% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 7.67% | 5.49% | 7.79% | 5.30% | — | |
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Net operating assets = Operating assets – Operating liabilities
= 100,238 – 17,421 = 82,817
2 2025 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2025 – Net operating assets2024
= 82,817 – 75,376 = 7,441
3 2025 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 7,441 ÷ [(82,817 + 75,376) ÷ 2] = 9.41%
4 Click competitor name to see calculations.
The balance-sheet-based accruals ratio exhibits a notable shift over the observed period. Initially negative, the ratio transitions to positive values and demonstrates increasing magnitude. Net operating assets consistently increased throughout the period, while aggregate accruals experienced significant fluctuations.
- Net Operating Assets
- Net operating assets increased steadily from US$70,112 million in 2022 to US$82,817 million in 2025. This represents a cumulative increase of approximately 18.1% over the four-year period, indicating consistent operational growth.
- Balance-Sheet-Based Aggregate Accruals
- Balance-sheet-based aggregate accruals were negative in 2022, at US$-1,258 million, suggesting a reduction in operating assets financed by current liabilities. A substantial positive swing occurred in 2023, with accruals reaching US$3,567 million. Accruals decreased in 2024 to US$1,697 million before increasing significantly to US$7,441 million in 2025. This volatility suggests changing patterns in the timing of cash flows relative to reported earnings.
- Balance-Sheet-Based Accruals Ratio
- The balance-sheet-based accruals ratio was -1.78% in 2022, reflecting the negative aggregate accruals. In 2023, the ratio rose sharply to 4.96%, coinciding with the positive accruals. The ratio moderated to 2.28% in 2024, then increased substantially to 9.41% in 2025. The increasing ratio suggests a growing proportion of reported earnings are attributable to accruals rather than cash flows. This trend warrants further investigation to assess the sustainability of earnings and potential for earnings manipulation.
The significant increase in the accruals ratio in 2025, coupled with the prior year’s fluctuations, indicates a potential shift in the company’s earnings quality. While increasing net operating assets are positive, the growing reliance on accruals to generate reported earnings requires further scrutiny.
Cash-Flow-Statement-Based Accruals Ratio
Thermo Fisher Scientific Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2025 | Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Thermo Fisher Scientific Inc. | 6,704) | 6,335) | 5,995) | 6,950) | 7,725) | |
| Less: Net cash provided by operating activities | 7,818) | 8,667) | 8,406) | 9,154) | 9,312) | |
| Less: Net cash used in investing activities | (4,047) | (5,841) | (5,142) | (2,159) | (21,932) | |
| Cash-flow-statement-based aggregate accruals | 2,933) | 3,509) | 2,731) | (45) | 20,345) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 3.71% | 4.71% | 3.80% | -0.06% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| AbbVie Inc. | -13.17% | 10.32% | -24.89% | -16.25% | — | |
| Amgen Inc. | -0.56% | -11.16% | 52.47% | 8.81% | — | |
| Bristol-Myers Squibb Co. | -5.49% | -4.97% | -5.99% | -9.10% | — | |
| Danaher Corp. | -2.47% | -1.25% | 8.20% | 1.44% | — | |
| Eli Lilly & Co. | 27.81% | 28.42% | 28.01% | 10.27% | — | |
| Gilead Sciences Inc. | 8.65% | -18.05% | -0.19% | -4.95% | — | |
| Johnson & Johnson | 26.80% | 10.58% | 13.66% | 10.78% | — | |
| Merck & Co. Inc. | 19.75% | 5.00% | 2.23% | 0.61% | — | |
| Pfizer Inc. | -1.91% | -5.24% | 19.96% | 18.46% | — | |
| Regeneron Pharmaceuticals Inc. | 0.64% | 12.04% | 14.35% | 18.61% | — | |
| Vertex Pharmaceuticals Inc. | 11.22% | 43.34% | 62.03% | -14.45% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 6.42% | 2.07% | 9.68% | 2.52% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 4.65% | 4.00% | 8.59% | 4.25% | — | |
Based on: 10-K (reporting date: 2025-12-31), 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31).
1 2025 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,933 ÷ [(82,817 + 75,376) ÷ 2] = 3.71%
2 Click competitor name to see calculations.
Net operating assets exhibited a consistent upward trend over the four-year period, increasing from 70,112 million US dollars in 2022 to 82,817 million US dollars in 2025. The cash-flow-statement-based aggregate accruals demonstrate a significant shift in pattern over the same timeframe. Initially negative, these accruals became positive and increased through 2024 before decreasing slightly in 2025. Consequently, the cash-flow-statement-based accruals ratio displays a corresponding change, moving from negative values to positive values and then stabilizing.
- Cash-Flow-Statement-Based Aggregate Accruals
- In 2022, cash-flow-statement-based aggregate accruals were -45 million US dollars. This indicates that, during that year, the company generated more cash from its operations than was reflected in reported net income. A substantial increase is observed in 2023, with accruals rising to 2,731 million US dollars. This trend continued into 2024, reaching 3,509 million US dollars, before moderating to 2,933 million US dollars in 2025. The positive accruals in the latter three years suggest that net income exceeded cash flow from operations.
- Cash-Flow-Statement-Based Accruals Ratio
- The cash-flow-statement-based accruals ratio was -0.06% in 2022, aligning with the negative aggregate accruals. A dramatic increase is then seen in 2023, with the ratio reaching 3.80%. Further growth occurred in 2024, peaking at 4.71%. The ratio decreased slightly to 3.71% in 2025. The positive ratios from 2023 onwards indicate that a greater proportion of reported earnings are attributable to accruals rather than actual cash flow. The stabilization in 2025 suggests a potential leveling off of this trend.
The shift from negative to positive accruals and the corresponding increase in the accruals ratio warrant further investigation. While positive accruals are not inherently negative, a consistently high or increasing ratio may signal potential concerns regarding the quality of earnings and the sustainability of reported profitability. The slight decrease in both accruals and the accruals ratio in 2025 could be an early indicator of a reversal, but continued monitoring is recommended.