Thermo Fisher Scientific Inc. (TMO)
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
Thermo Fisher Scientific Inc., balance sheet computation of aggregate accruals
USD $ in millions
| Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 56,232 | 56,669 | 45,908 | 40,889 | 42,852 | |
| Less: Cash and cash equivalents | 2,103 | 1,335 | 786 | 452 | 1,344 | |
| Operating assets | 54,129 | 55,334 | 45,121 | 40,437 | 41,509 | |
| Operating Liabilities | ||||||
| Total liabilities | 28,646 | 31,256 | 24,368 | 19,539 | 22,304 | |
| Less: Short-term obligations and current maturities of long-term obligations | 1,271 | 2,135 | 1,256 | 1,053 | 2,212 | |
| Less: Long-term obligations, excluding current maturities | 17,719 | 18,873 | 15,372 | 11,474 | 12,352 | |
| Operating liabilities | 9,656 | 10,248 | 7,740 | 7,012 | 7,740 | |
| Net operating assets1 | 44,473 | 45,086 | 37,381 | 33,425 | 33,769 | |
| Balance-sheet-based aggregate accruals2 | (613) | 7,705 | 3,956 | (344) | — | |
| Ratio | ||||||
| Balance-sheet-based accruals ratio3 | -1.37% | 18.69% | 11.17% | -1.02% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Becton, Dickinson & Co. | 80.26% | 0.01% | -5.12% | 98.81% | -1.99% | |
| Intuitive Surgical Inc. | 26.86% | -15.26% | 15.49% | 24.98% | — | |
| Medtronic PLC | -7.08% | -0.74% | 1.04% | 121.30% | — | |
| Stryker Corp. | 21.55% | 9.67% | 42.96% | 11.06% | — | |
| UnitedHealth Group Inc. | 13.95% | 13.02% | 9.15% | 26.14% | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 13.97% | 7.81% | 7.23% | 53.16% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | -1.89% | 7.94% | 0.81% | 35.33% | — | |
Based on: 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-28), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-26).
1 2018 Calculation
Net operating assets = Operating assets – Operating liabilities
= 54,129 – 9,656 = 44,473
2 2018 Calculation
Balance-sheet-based aggregate accruals = Net operating assets 2018 – Net operating assets 2017
= 44,473 – 45,086 = -613
3 2018 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -613 ÷ [(44,473 + 45,086) ÷ 2] = -1.37%
4 Click competitor name to see calculations.
| 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, Thermo Fisher Scientific Inc. improved earnings quality from 2017 to 2018. |
Cash-Flow-Statement-Based Accruals Ratio
Thermo Fisher Scientific Inc., cash flow statement computation of aggregate accruals
USD $ in millions
| Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | ||
|---|---|---|---|---|---|---|
| Net income | 2,938 | 2,225 | 2,022 | 1,975 | 1,894 | |
| Less: Net cash provided by operating activities | 4,543 | 4,006 | 3,158 | 2,826 | 2,624 | |
| Less: Net cash used in investing activities | (1,253) | (7,729) | (5,532) | (1,087) | (11,783) | |
| Cash-flow-statement-based aggregate accruals | (352) | 5,948 | 4,396 | 237 | 11,053 | |
| Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | -0.79% | 14.43% | 12.42% | 0.71% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Becton, Dickinson & Co. | 45.11% | -3.22% | -5.06% | 58.68% | 6.10% | |
| Intuitive Surgical Inc. | 31.54% | -28.80% | 32.51% | 27.16% | — | |
| Medtronic PLC | -10.98% | -1.82% | -5.58% | 34.07% | — | |
| Stryker Corp. | 23.53% | 7.81% | 37.39% | -17.68% | — | |
| UnitedHealth Group Inc. | 11.81% | 8.68% | 11.49% | 29.94% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 8.08% | 4.70% | 5.71% | 24.32% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | -8.00% | -0.19% | 2.89% | 18.47% | — | |
Based on: 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-28), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-26).
1 2018 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -352 ÷ [(44,473 + 45,086) ÷ 2] = -0.79%
2 Click competitor name to see calculations.
| 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, Thermo Fisher Scientific Inc. improved earnings quality from 2017 to 2018. |