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% | — | — | — | — | |
| Elevance Health Inc. | 0.32% | — | — | — | — | |
| Intuitive Surgical Inc. | -10.21% | — | — | — | — | |
| Medtronic PLC | -1.37% | — | — | — | — | |
| UnitedHealth Group Inc. | 17.32% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 6.46% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 5.30% | 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.
An analysis of the financial reporting quality from 2019 to 2022 reveals a period of significant expansion in the operating asset base accompanied by a stabilization of aggregate accruals. This divergence has resulted in a marked decline in the balance-sheet-based accruals ratio over the final two years of the observed period.
- Net Operating Assets Trend
- Net operating assets demonstrated consistent and substantial growth, increasing from $424 million in 2019 to $1.71 billion by December 31, 2022. This trajectory indicates a steady expansion of the company's operational scale over the four-year period.
- Aggregate Accruals Dynamics
- Balance-sheet-based aggregate accruals experienced a sharp escalation between 2019 and 2020, rising from $128.7 million to $424.8 million. Following this initial spike, the absolute value of accruals remained relatively stable, plateauing between $424.8 million and $434.5 million from 2020 through 2022.
- Accruals Ratio Analysis
- The accruals ratio peaked in 2020 at 66.75%, reflecting a period where accruals grew at a pace significantly exceeding the growth of net operating assets. However, as operating assets continued to expand while aggregate accruals remained flat, the ratio decreased to 40.76% in 2021 and further to 28.49% in 2022. This downward trend suggests an improvement in earnings quality, as a smaller proportion of the operating asset base is attributed to accruals relative to cash-backed assets.
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Cash-Flow-Statement-Based Accruals Ratio
DexCom Inc., cash flow statement computation of aggregate accruals
US$ 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% | — | — | — | — | |
| Elevance Health Inc. | 8.35% | — | — | — | — | |
| Intuitive Surgical Inc. | -20.88% | — | — | — | — | |
| Medtronic PLC | -0.97% | — | — | — | — | |
| UnitedHealth Group Inc. | 21.73% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 8.70% | 11.34% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 4.25% | 14.62% | — | — | — | |
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.
An analysis of the financial reporting quality reveals a significant shift in the relationship between reported earnings and cash flows from 2019 through 2022. While the company experienced consistent growth in its asset base, the accruals used to recognize income showed high volatility, ultimately trending toward a more conservative alignment with cash flow.
- Net Operating Assets
- A consistent and substantial upward trend is observed in net operating assets, which grew from 424,000 thousand US dollars in 2019 to 1,709,700 thousand US dollars by the end of 2022. This steady expansion indicates a significant increase in the company's operational scale and investment in working capital over the four-year period.
- Cash-flow-statement-based Aggregate Accruals
- Aggregate accruals exhibited high volatility. After increasing from 801,800 thousand US dollars in 2019 to a peak of 1,036,000 thousand US dollars in 2020, there was a sharp reversal in 2021, where accruals became negative at -71,700 thousand US dollars. A partial recovery occurred in 2022, with accruals rising to 193,200 thousand US dollars.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio underwent a dramatic decline, moving from an exceptionally high 222.94% in 2019 and 162.79% in 2020 to -6.73% in 2021, and stabilizing at 12.91% in 2022. The initial high ratios suggest that a large portion of reported earnings was not backed by immediate cash inflows. However, the transition to a low positive and briefly negative ratio indicates a marked improvement in earnings quality, as reported profits became more closely aligned with actual cash flow generated from operations.
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