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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Zoetis Inc. pages available for free this week:
- Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Liquidity Ratios
- Analysis of Short-term (Operating) Activity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Analysis of Geographic Areas
- Enterprise Value to EBITDA (EV/EBITDA)
- Return on Equity (ROE) since 2012
- Total Asset Turnover since 2012
- Price to Sales (P/S) since 2012
- Analysis of Revenues
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Balance-Sheet-Based Accruals Ratio
Zoetis Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term borrowings | ||||||
| Less: Current portion of long-term debt | ||||||
| Less: Finance lease liabilities, current | ||||||
| Less: Long-term debt, net of discount and issuance costs, excluding current portion | ||||||
| Less: Finance lease liabilities, noncurrent | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| AbbVie Inc. | ||||||
| Amgen Inc. | ||||||
| Bristol-Myers Squibb Co. | ||||||
| Danaher Corp. | ||||||
| Eli Lilly & Co. | ||||||
| Gilead Sciences Inc. | ||||||
| Johnson & Johnson | ||||||
| Merck & Co. Inc. | ||||||
| Pfizer Inc. | ||||||
| Regeneron Pharmaceuticals Inc. | ||||||
| Thermo Fisher Scientific Inc. | ||||||
| Vertex Pharmaceuticals Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | ||||||
Based on: 10-K (reporting date: 2023-12-31), 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: 2019-12-31).
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.
The data indicates a progressive increase in net operating assets over the four-year period, rising from 7,368 million US dollars at the end of 2020 to 9,526 million US dollars by the end of 2023. This steady upward trend suggests growth in the company’s core operational asset base.
Balance-sheet-based aggregate accruals demonstrate more volatility in their pattern. Beginning at 147 million US dollars in 2020, there was a marked increase to 283 million in 2021, followed by a significant surge to 1,075 million in 2022. In 2023, the figure decreased to 800 million US dollars, although it remained substantially elevated compared to the initial years.
The balance-sheet-based accruals ratio further reflects this volatility when compared to net operating assets. The ratio was relatively low in 2020 at 2.02%, nearly doubling to 3.77% in 2021, then sharply increasing to 13.13% in 2022. In 2023, the ratio declined to 8.77%, yet still indicates a higher proportion of accruals relative to net operating assets than in the earlier years.
These patterns suggest an overall growth in net operating assets coupled with significant fluctuations in accruals and their proportional impact on the balance sheet. The spike in accruals in 2022 and the subsequent reduction in 2023 may indicate changes in accounting practices, timing differences in revenue and expense recognition, or other operational factors affecting earnings quality. The elevated accruals ratio in the later years could imply increased earnings management risk or complexities in financial reporting during this period.
Cash-Flow-Statement-Based Accruals Ratio
Zoetis Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Zoetis Inc. | ||||||
| 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 | ||||||
| AbbVie Inc. | ||||||
| Amgen Inc. | ||||||
| Bristol-Myers Squibb Co. | ||||||
| Danaher Corp. | ||||||
| Eli Lilly & Co. | ||||||
| Gilead Sciences Inc. | ||||||
| Johnson & Johnson | ||||||
| Merck & Co. Inc. | ||||||
| Pfizer Inc. | ||||||
| Regeneron Pharmaceuticals Inc. | ||||||
| Thermo Fisher Scientific Inc. | ||||||
| Vertex Pharmaceuticals Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | ||||||
Based on: 10-K (reporting date: 2023-12-31), 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: 2019-12-31).
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 data reveals several notable trends in the financial reporting quality measures over the four-year period ending December 31, 2023.
- Net Operating Assets
- There is a consistent upward trend in net operating assets, increasing from US$7,368 million in 2020 to US$9,526 million in 2023. This reflects a steady growth in the company's operational asset base, suggesting expansion or reinvestment activities over the period.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals display significant volatility. Beginning at US$84 million in 2020, the figure increased to US$282 million in 2021, followed by a sharp surge to US$1,085 million in 2022. It then decreased to US$768 million in 2023. This fluctuation may indicate variations in the timing differences between income recognition and cash flows, which could impact earnings quality.
- Cash-Flow-Statement-Based Accruals Ratio
- Mirroring the trend in aggregate accruals, the accruals ratio also exhibits variability. Starting at a low 1.15% in 2020, it rose to 3.76% in 2021, peaked at 13.25% in 2022, and then declined to 8.42% in 2023. Despite the decrease from its peak, the ratio remains considerably higher than at the start of the period, suggesting increased reliance on accrual accounting in recent years.
Collectively, while the increase in net operating assets points to growth, the heightened and fluctuating accruals and accrual ratios indicate potential shifts in earnings quality. The elevated accrual ratio in 2022 and 2023 could suggest more pronounced differences between reported earnings and cash flows, which may warrant further investigation to assess the sustainability and quality of reported earnings.