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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- Statement of Comprehensive Income
- Cash Flow Statement
- Analysis of Solvency Ratios
- Price to FCFE (P/FCFE)
- Capital Asset Pricing Model (CAPM)
- Present Value of Free Cash Flow to Equity (FCFE)
- Return on Equity (ROE) since 2005
- Current Ratio since 2005
- Price to Operating Profit (P/OP) since 2005
- Price to Sales (P/S) since 2005
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Balance-Sheet-Based Accruals Ratio
Align Technology Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Marketable securities, short-term | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| 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: 2022-12-31), 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).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= – =
3 2022 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 reveals significant fluctuations in key financial metrics over the four-year period under review.
- Net Operating Assets
- There is a pronounced upward trend in net operating assets, starting from approximately $477.5 million at the end of 2019, increasing sharply to around $2.27 billion in 2020. The growth continued at a slower pace in subsequent years, rising to about $2.45 billion in 2021 and $2.60 billion in 2022. This pattern suggests a substantial expansion in the company's asset base over the period.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals experienced a dramatic increase from a negative value of roughly -$40 million in 2019 to approximately $1.80 billion in 2020. After this surge, the accruals sharply declined to $178.35 million in 2021, followed by a further decrease to $150.4 million in 2022. Despite the reduction in the last two years, the levels remain positive and significantly higher than the 2019 figure, indicating variations in the company's non-cash accounting adjustments or timing differences in revenue and expenses recognition.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio exhibited extreme volatility, transitioning from a negative ratio of -8.04% in 2019 to an unusually high 130.55% in 2020. This indicates that accruals were more than the net operating assets at that point, suggesting potential distortions or anomalies in that year’s accrual accounting. The ratio then normalized substantially in the following years, dropping to 7.55% in 2021 and 5.95% in 2022, representing a more typical and stable level of accruals relative to net operating assets.
Overall, the data indicates a period of significant asset growth accompanied by unusual accrual behavior in 2020, which largely stabilized in subsequent years. The large swings in accrual measures may warrant further investigation to understand the underlying causes, such as changes in accounting policies, business activities, or other external factors influencing financial reporting quality during that period.
Cash-Flow-Statement-Based Accruals Ratio
Align Technology Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income | ||||||
| Less: Net cash provided by operating activities | ||||||
| Less: Net cash (used in) provided by 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: 2022-12-31), 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).
1 2022 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 analysis of the financial reporting quality measures over the four-year period reveals several notable trends and fluctuations in the key metrics presented.
- Net Operating Assets
- The net operating assets exhibited a substantial increase from 2019 through 2022. Starting at approximately $477.5 million in 2019, the figure surged sharply to around $2.27 billion in 2020. This upward trend continued, albeit at a slower pace, with the net operating assets rising further to $2.45 billion in 2021 and reaching about $2.6 billion in 2022. The considerable growth between 2019 and 2020 suggests significant investments or operational expansions during that interval, followed by more moderate growth in subsequent years.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals, based on the cash flow statement, demonstrated a highly volatile pattern. In 2019, the accruals totaled approximately $45.95 million, then surged dramatically to about $1.345 billion in 2020, closely mirroring the sharp increase observed in net operating assets over the same period. However, in 2021, there was a pronounced decline to roughly $163 million, followed by a further steep drop to just over $6 million in 2022. This significant decrease in aggregate accruals post-2020 may indicate improvements in cash flow quality or changes in the company’s accrual management practices.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, which represents the proportion of accruals relative to net operating assets, showed a corresponding dramatic shift. The ratio was 9.24% in 2019 but skyrocketed to an exceptionally high 97.81% in 2020. Thereafter, it decreased sharply to 6.9% in 2021 and further diminished to a minimal 0.24% in 2022. This trend points to a transient period in 2020 with a pronounced accrual component relative to operating assets, possibly reflecting accounting adjustments or anomalies in cash flow recognition. The substantial decline following 2020 suggests a return to a more normalized accrual level, enhancing the predictability and quality of reported earnings.
Overall, the data depicts a period of rapid growth in net operating assets coinciding with a temporary spike in accruals and accrual ratio in 2020, followed by a significant normalization phase in the subsequent years. The pronounced peak in 2020 accruals and ratio could warrant further investigation to understand underlying operational or accounting events during that year. The trends in the later years imply improved alignment between cash flows and earnings, potentially indicating enhanced financial statement quality.