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
Shockwave Medical Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 1,566,563) | 646,089) | 345,682) | 272,042) | 231,938) | |
| Less: Cash and cash equivalents | 328,422) | 156,586) | 89,209) | 50,423) | 139,045) | |
| Less: Short-term investments | 662,132) | 147,907) | 111,772) | 151,931) | 56,304) | |
| Operating assets | 576,009) | 341,596) | 144,701) | 69,688) | 36,589) | |
| Operating Liabilities | ||||||
| Total liabilities | 897,886) | 134,773) | 103,852) | 46,388) | 39,285) | |
| Less: Debt, current portion | —) | —) | 5,500) | 3,300) | 6,667) | |
| Less: Convertible debt, noncurrent portion | 731,863) | —) | —) | —) | —) | |
| Less: Debt, noncurrent portion | —) | 24,198) | 11,630) | 13,319) | 7,152) | |
| Operating liabilities | 166,023) | 110,575) | 86,722) | 29,769) | 25,466) | |
| Net operating assets1 | 409,986) | 231,021) | 57,979) | 39,919) | 11,123) | |
| Balance-sheet-based aggregate accruals2 | 178,965) | 173,042) | 18,060) | 28,796) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 55.84% | 119.75% | 36.90% | 112.83% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Abbott Laboratories | 6.06% | -0.73% | -1.76% | — | — | |
| CVS Health Corp. | 16.15% | -9.86% | -3.68% | — | — | |
| Elevance Health Inc. | 7.14% | 0.32% | 14.93% | — | — | |
| Intuitive Surgical Inc. | 15.55% | -10.21% | 50.02% | — | — | |
| Medtronic PLC | 2.69% | -1.37% | 3.72% | — | — | |
| UnitedHealth Group Inc. | 13.41% | 17.32% | 4.32% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 11.11% | 1.32% | 2.24% | 200.00% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Health Care | 8.72% | 3.57% | 4.72% | 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
= 576,009 – 166,023 = 409,986
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 409,986 – 231,021 = 178,965
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 178,965 ÷ [(409,986 + 231,021) ÷ 2] = 55.84%
4 Click competitor name to see calculations.
The data shows notable fluctuations in the net operating assets and accruals over the four-year period ending December 31, 2023.
- Net Operating Assets
- The net operating assets increased significantly from 39,919 thousand US dollars in 2020 to 57,979 thousand in 2021, representing moderate growth. However, a substantial acceleration occurred in 2022, with net operating assets more than tripling to 231,021 thousand US dollars. This upward trend continued into 2023, reaching 409,986 thousand US dollars, nearly doubling the previous year’s amount. The pattern suggests aggressive asset accumulation or investments over the period, particularly from 2021 onward.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals demonstrate a contrasting pattern. After a decrease from 28,796 thousand in 2020 to 18,060 thousand in 2021, there was a dramatic increase to 173,042 thousand in 2022. The level then stabilized in 2023 with a slight rise to 178,965 thousand US dollars. This volatility indicates significant changes in accrued expenses and revenues, potentially reflecting variations in accounting estimates, revenue recognition, or expense timing.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, expressed as a percentage of net operating assets, decreased sharply from 112.83% in 2020 to 36.9% in 2021, indicating a reduction in accruals relative to net assets. However, this ratio surged back to 119.75% in 2022, implying that accrued items exceeded net operating assets that year. By 2023, the ratio declined again to 55.84%, signaling a decrease in the proportion of accruals relative to net operating assets compared to the prior year but remaining elevated compared with 2021.
Overall, the data reveals substantial growth in net operating assets accompanied by large fluctuations in balance-sheet-based accruals and their relative ratio. The spikes in accrual measures, particularly in 2022, suggest irregularities or one-off adjustments affecting the quality of earnings and balance sheet consistency. The declines in the accruals ratio in 2021 and 2023 indicate partial normalization, but elevated levels in 2022 and 2023 warrant scrutiny regarding the timing and recognition of accrued items.
Cash-Flow-Statement-Based Accruals Ratio
Shockwave Medical Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | ||
|---|---|---|---|---|---|---|
| Net income (loss) | 147,278) | 215,996) | (9,136) | (65,699) | (51,109) | |
| Less: Net cash provided by (used in) operating activities | 196,053) | 117,732) | 15,036) | (71,184) | (48,107) | |
| Less: Net cash (used in) provided by investing activities | (625,727) | (62,150) | 26,416) | (107,473) | (59,543) | |
| Cash-flow-statement-based aggregate accruals | 576,952) | 160,414) | (50,588) | 112,958) | 56,541) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 180.01% | 111.01% | -103.35% | 442.61% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Abbott Laboratories | 3.55% | -2.08% | -3.29% | — | — | |
| CVS Health Corp. | 13.47% | -6.15% | -4.20% | — | — | |
| Elevance Health Inc. | 12.87% | 8.35% | 30.34% | — | — | |
| Intuitive Surgical Inc. | 4.54% | -20.88% | 33.51% | — | — | |
| Medtronic PLC | 1.80% | -0.97% | 0.35% | — | — | |
| UnitedHealth Group Inc. | 7.40% | 21.73% | 5.77% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Health Care Equipment & Services | 8.16% | 4.02% | 2.39% | 2.23% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Health Care | 9.13% | 3.06% | 6.04% | 14.36% | — | |
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 × 576,952 ÷ [(409,986 + 231,021) ÷ 2] = 180.01%
2 Click competitor name to see calculations.
The analysis of the financial quality measures over the four-year period reveals notable trends and fluctuations in the company's operating assets and accruals.
- Net Operating Assets
- The net operating assets demonstrated a significant upward trajectory from 39,919 thousand US dollars at the end of 2020 to 409,986 thousand US dollars by the end of 2023. This represents a more than tenfold increase over the four years, with the most substantial growth occurring between 2021 and 2022, where the value surged from 57,979 to 231,021 thousand US dollars. This trend suggests aggressive asset accumulation or expansion activities during this period.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals showed considerable volatility throughout the observed periods. Starting at 112,958 thousand US dollars in 2020, the measure dropped sharply to a negative figure of -50,588 thousand US dollars in 2021, indicating a reversal or adjustment in accruals. Subsequently, it rebounded to 160,414 thousand US dollars in 2022 and rose markedly to 576,952 thousand US dollars by the end of 2023. This pattern indicates fluctuating earnings quality components, with substantial positive accruals in the latest periods.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio, reflecting the proportion of accruals relative to cash flows, also exhibited significant swings. Beginning at an elevated 442.61% in 2020, it turned negative to -103.35% in 2021, corresponding to the negative aggregate accruals noted in that year. The ratio then normalized to 111.01% in 2022 and increased further to 180.01% by the end of 2023. These fluctuations suggest varying reliability of accruals relative to cash flows, with a particularly high ratio in 2020 and subsequent years implying aggressive accrual accounting or strong growth in non-cash operations.
Overall, the data indicates substantial growth in net operating assets accompanied by considerable variability in accrual measures. The pronounced positive accruals and elevated accrual ratios in recent years could merit further investigation to understand the underlying drivers and their implications on earnings quality.