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
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 | 14,286) | 14,925) | 13,900) | 13,609) | 11,545) | |
| Less: Cash and cash equivalents | 2,041) | 3,581) | 3,485) | 3,604) | 1,934) | |
| Operating assets | 12,245) | 11,344) | 10,415) | 10,005) | 9,611) | |
| Operating Liabilities | ||||||
| Total liabilities | 9,295) | 10,522) | 9,356) | 9,836) | 8,837) | |
| Less: Short-term borrowings | 3) | 2) | —) | 4) | —) | |
| Less: Current portion of long-term debt | —) | 1,350) | —) | 600) | 500) | |
| Less: Finance lease liabilities, current | 1) | —) | —) | —) | —) | |
| Less: Long-term debt, net of discount and issuance costs, excluding current portion | 6,564) | 6,552) | 6,592) | 6,595) | 5,947) | |
| Less: Finance lease liabilities, noncurrent | 8) | —) | —) | —) | —) | |
| Operating liabilities | 2,719) | 2,618) | 2,764) | 2,637) | 2,390) | |
| Net operating assets1 | 9,526) | 8,726) | 7,651) | 7,368) | 7,221) | |
| Balance-sheet-based aggregate accruals2 | 800) | 1,075) | 283) | 147) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 8.77% | 13.13% | 3.77% | 2.02% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| AbbVie Inc. | -22.39% | -14.27% | — | — | — | |
| Amgen Inc. | 57.08% | 4.07% | — | — | — | |
| Bristol-Myers Squibb Co. | -7.12% | -3.86% | — | — | — | |
| Danaher Corp. | 3.48% | -1.55% | — | — | — | |
| Eli Lilly & Co. | 28.59% | 11.56% | — | — | — | |
| Gilead Sciences Inc. | 1.04% | -2.92% | — | — | — | |
| Johnson & Johnson | -21.13% | 19.84% | — | — | — | |
| Merck & Co. Inc. | 3.16% | 0.46% | — | — | — | |
| Pfizer Inc. | 30.66% | 24.95% | — | — | — | |
| Regeneron Pharmaceuticals Inc. | 1.17% | 11.07% | — | — | — | |
| Thermo Fisher Scientific Inc. | 4.96% | -1.78% | — | — | — | |
| Vertex Pharmaceuticals Inc. | 61.24% | 14.07% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 7.35% | 4.85% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 7.79% | 5.30% | 200.00% | — | — | |
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
= 12,245 – 2,719 = 9,526
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 9,526 – 8,726 = 800
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 800 ÷ [(9,526 + 8,726) ÷ 2] = 8.77%
4 Click competitor name to see calculations.
An analysis of balance-sheet-based accruals reveals a period of relative stability followed by a significant escalation in non-cash accruals, peaking in 2022 before undergoing a partial correction in 2023.
- Net Operating Assets Growth
- A consistent upward trend is observed in net operating assets, which increased from US$ 7,368 million in 2020 to US$ 9,526 million in 2023. This steady growth indicates a continuous expansion of the operational asset base over the four-year period.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals exhibited substantial growth, rising from US$ 147 million in 2020 to US$ 283 million in 2021, before surging to a peak of US$ 1,075 million in 2022. A decrease to US$ 800 million was recorded in 2023, although the absolute value remains significantly higher than the levels observed in 2020 and 2021.
- Balance-Sheet-Based Accruals Ratio Analysis
- The accruals ratio remained low between 2020 and 2021, moving from 2.02% to 3.77%, suggesting that earnings were closely aligned with cash flows during this interval. A sharp increase to 13.13% occurred in 2022, representing a notable divergence between accounting earnings and cash-backed assets. While the ratio moderated to 8.77% in 2023, it remains elevated compared to the 2020-2021 baseline, indicating a shift in the reporting quality profile.
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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. | 2,344) | 2,114) | 2,037) | 1,638) | 1,500) | |
| Less: Net cash provided by operating activities | 2,353) | 1,912) | 2,213) | 2,126) | 1,795) | |
| Less: Net cash used in investing activities | (777) | (883) | (458) | (572) | (504) | |
| Cash-flow-statement-based aggregate accruals | 768) | 1,085) | 282) | 84) | 209) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 8.42% | 13.25% | 3.76% | 1.15% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| AbbVie Inc. | -24.89% | -16.25% | — | — | — | |
| Amgen Inc. | 52.47% | 8.81% | — | — | — | |
| Bristol-Myers Squibb Co. | -5.99% | -9.10% | — | — | — | |
| Danaher Corp. | 8.20% | 1.44% | — | — | — | |
| Eli Lilly & Co. | 28.01% | 10.27% | — | — | — | |
| Gilead Sciences Inc. | -0.19% | -4.95% | — | — | — | |
| Johnson & Johnson | 13.66% | 10.78% | — | — | — | |
| Merck & Co. Inc. | 2.23% | 0.61% | — | — | — | |
| Pfizer Inc. | 19.96% | 18.46% | — | — | — | |
| Regeneron Pharmaceuticals Inc. | 14.35% | 18.61% | — | — | — | |
| Thermo Fisher Scientific Inc. | 3.80% | -0.06% | — | — | — | |
| Vertex Pharmaceuticals Inc. | 62.03% | -14.45% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Pharmaceuticals, Biotechnology & Life Sciences | 9.68% | 2.52% | 15.89% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 8.59% | 4.25% | 14.62% | — | — | |
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 × 768 ÷ [(9,526 + 8,726) ÷ 2] = 8.42%
2 Click competitor name to see calculations.
Analysis of financial reporting quality between 2020 and 2023 reveals a period of expansion in both net operating assets and aggregate accruals, characterized by a significant peak in accrual-based earnings in 2022 followed by a partial correction in 2023.
- Net Operating Assets Trend
- A consistent upward trajectory is observed in net operating assets, which grew from 7,368 million US dollars in 2020 to 9,526 million US dollars by the end of 2023. This steady growth reflects a continuous expansion of the operational asset base over the analyzed period.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals exhibited substantial volatility. Starting at 84 million US dollars in 2020, values rose to 282 million US dollars in 2021 and surged to a peak of 1,085 million US dollars in 2022. A subsequent reduction to 768 million US dollars in 2023 indicates a decrease in the divergence between accrual-based accounting and cash flow generation.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio demonstrates a sharp escalation from 1.15% in 2020 to a high of 13.25% in 2022. Such an increase typically suggests that a larger portion of reported earnings was derived from non-cash accruals relative to net operating assets, which can indicate lower earnings quality. The moderation of this ratio to 8.42% in 2023 suggests a shift back toward higher cash-flow alignment, though it remains elevated compared to 2020 and 2021 levels.
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