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
DexCom 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 | 5,391,700) | 4,863,600) | 4,290,500) | 2,395,000) | 1,916,000) | |
| Less: Cash and cash equivalents | 642,300) | 1,052,600) | 817,600) | 446,200) | 1,137,000) | |
| Less: Short-term marketable securities | 1,813,900) | 1,678,600) | 1,890,100) | 1,087,100) | 248,600) | |
| Operating assets | 2,935,500) | 2,132,400) | 1,582,800) | 861,700) | 530,400) | |
| Operating Liabilities | ||||||
| Total liabilities | 3,259,900) | 2,612,100) | 2,464,000) | 1,512,400) | 1,252,700) | |
| Less: Short-term finance lease liabilities | 4,200) | 3,300) | 8,800) | 600) | —) | |
| Less: Current portion of long-term senior convertible notes | 772,600) | —) | —) | —) | —) | |
| Less: Long-term senior convertible notes | 1,197,700) | 1,702,700) | 1,667,200) | 1,059,700) | 1,010,300) | |
| Less: Long-term finance lease liabilities | 59,600) | 57,000) | 54,000) | 14,400) | 7,300) | |
| Operating liabilities | 1,225,800) | 849,100) | 734,000) | 437,700) | 235,100) | |
| Net operating assets1 | 1,709,700) | 1,283,300) | 848,800) | 424,000) | 295,300) | |
| Balance-sheet-based aggregate accruals2 | 426,400) | 434,500) | 424,800) | 128,700) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 28.49% | 40.76% | 66.75% | 35.78% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Abbott Laboratories | -0.73% | -1.76% | — | — | — | |
| CVS Health Corp. | -9.86% | -3.68% | — | — | — | |
| Elevance Health Inc. | 0.32% | 14.93% | — | — | — | |
| Intuitive Surgical Inc. | -10.21% | 50.02% | — | — | — | |
| Medtronic PLC | -1.37% | 3.72% | — | — | — | |
| UnitedHealth Group Inc. | 17.32% | 4.32% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 1.32% | 2.24% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 3.57% | 4.72% | 200.00% | — | — | |
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
= 2,935,500 – 1,225,800 = 1,709,700
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 1,709,700 – 1,283,300 = 426,400
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 426,400 ÷ [(1,709,700 + 1,283,300) ÷ 2] = 28.49%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited a consistent and significant increase over the four-year period. Starting at 424,000 thousand US dollars at the end of 2019, the figure doubled by the end of 2020 to 848,800 thousand US dollars. This upward trend continued with a rise to 1,283,300 thousand US dollars in 2021, and reached 1,709,700 thousand US dollars by the end of 2022. This indicates substantial growth in the company's operating asset base year-over-year.
- Balance-Sheet-Based Aggregate Accruals
- The balance-sheet-based aggregate accruals showed considerable variation. Beginning at 128,700 thousand US dollars in 2019, this metric increased significantly to 424,800 thousand US dollars in 2020, more than tripling from the previous year. It reached a peak of 434,500 thousand US dollars in 2021 and then decreased slightly to 426,400 thousand US dollars in 2022. The accruals demonstrate a sharp increase in 2020, followed by stabilization at a high level.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, representing the proportion of accruals to net operating assets, peaked in 2020 at 66.75%. Afterward, there was a marked decline to 40.76% in 2021, and a further decrease to 28.49% by the end of 2022. This downward trend in the accruals ratio suggests an improvement in financial reporting quality or a reduction in accrual-based adjustments relative to the growing base of net operating assets over time.
Cash-Flow-Statement-Based Accruals Ratio
DexCom 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 (loss) | 341,200) | 154,700) | 493,600) | 101,100) | (127,100) | |
| Less: Net cash provided by operating activities | 669,500) | 442,500) | 475,600) | 314,500) | 123,200) | |
| Less: Net cash used in investing activities | (521,500) | (216,100) | (1,018,000) | (1,015,200) | (139,800) | |
| Cash-flow-statement-based aggregate accruals | 193,200) | (71,700) | 1,036,000) | 801,800) | (110,500) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 12.91% | -6.73% | 162.79% | 222.94% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Abbott Laboratories | -2.08% | -3.29% | — | — | — | |
| CVS Health Corp. | -6.15% | -4.20% | — | — | — | |
| Elevance Health Inc. | 8.35% | 30.34% | — | — | — | |
| Intuitive Surgical Inc. | -20.88% | 33.51% | — | — | — | |
| Medtronic PLC | -0.97% | 0.35% | — | — | — | |
| UnitedHealth Group Inc. | 21.73% | 5.77% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 4.02% | 2.39% | 2.23% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 3.06% | 6.04% | 14.36% | — | — | |
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 × 193,200 ÷ [(1,709,700 + 1,283,300) ÷ 2] = 12.91%
2 Click competitor name to see calculations.
- Net Operating Assets
- There is a consistent and substantial increase in net operating assets over the four-year period. The value more than doubled from 424,000 thousand US dollars in 2019 to 848,800 thousand US dollars in 2020. This upward trend continued with values rising to 1,283,300 thousand in 2021 and further to 1,709,700 thousand in 2022. This suggests an ongoing expansion or accumulation of operating resources.
- Cash-Flow-Statement-Based Aggregate Accruals
- This metric shows significant volatility across the years. It started at 801,800 thousand US dollars in 2019 and increased to 1,036,000 thousand in 2020, indicating positive accrual adjustments. However, in 2021 the figure sharply turned negative to -71,700 thousand, indicating substantial cash flow adjustments opposing net income effects. In 2022, the value reverted to a positive 193,200 thousand, indicating some normalization but still considerably lower compared to the initial years.
- Cash-Flow-Statement-Based Accruals Ratio
- This ratio, reflecting the relationship between accruals and net operating assets, demonstrates considerable fluctuations. It decreased markedly from 222.94% in 2019 to 162.79% in 2020, indicating lower accrual intensity relative to asset base. In 2021, the ratio experienced a profound drop to negative 6.73%, correlating with the negative aggregate accruals and suggesting a shift in cash flow dynamics. By 2022, the ratio rebounded to a positive but modest 12.91%, indicating improved but still restrained accrual activity relative to net operating assets.