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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Abbott Laboratories pages available for free this week:
- Balance Sheet: Assets
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Profitability Ratios
- Enterprise Value to FCFF (EV/FCFF)
- Present Value of Free Cash Flow to Equity (FCFE)
- Net Profit Margin since 2005
- Return on Assets (ROA) since 2005
- Total Asset Turnover since 2005
- Price to Earnings (P/E) since 2005
- Price to Sales (P/S) since 2005
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Balance-Sheet-Based Accruals Ratio
Abbott Laboratories, balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Less: Investments, primarily bank time deposits and U.S. treasury bills | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term borrowings | ||||||
| Less: Current portion of long-term debt | ||||||
| Less: Long-term debt, excluding current portion | ||||||
| Operating liabilities | ||||||
| Net operating assets1 | ||||||
| Balance-sheet-based aggregate accruals2 | ||||||
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | ||||||
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| 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: 2024-12-31), 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).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= – =
3 2024 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.
- Net Operating Assets
- The net operating assets demonstrated a consistent upward trend from 43,825 million US dollars at the end of 2021 to 54,059 million US dollars by the end of 2024. This represents a notable increase in operating assets over the four-year period, suggesting expansion in operational investment or asset utilization.
- Balance-sheet-based Aggregate Accruals
- The balance-sheet-based aggregate accruals showed a significant shift over the observed timeframe. Initially, the accruals were negative at -777 million US dollars in 2021 and improved to -317 million US dollars in 2022. However, there was a marked increase to positive values thereafter, reaching 2,719 million US dollars in 2023 and surging further to 7,832 million US dollars by the end of 2024. This indicates a transition from a negative to a substantially positive accruals position within the four years.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, expressed as a percentage, followed a similar pattern to aggregate accruals. It started negative at -1.76% in 2021, improved to -0.73% in 2022, and then rose significantly to 6.06% in 2023. By 2024, the ratio had increased further to 15.62%. This sharp upward trajectory implies an increasing proportion of accruals relative to net operating assets, reflecting heightened earnings management or changes in accrual accounting policies and practices during the period.
Cash-Flow-Statement-Based Accruals Ratio
Abbott Laboratories, cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net earnings | ||||||
| Less: Net cash from operating activities | ||||||
| Less: Net cash used in investing activities | ||||||
| Cash-flow-statement-based aggregate accruals | ||||||
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | ||||||
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| 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: 2024-12-31), 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).
1 2024 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.
- Net Operating Assets
- The net operating assets exhibit a steady increase over the four-year period. Starting at 43,825 million US dollars in 2021, the value slightly decreased to 43,508 million US dollars in 2022 but then rose to 46,227 million US dollars in 2023, followed by a significant increase to 54,059 million US dollars in 2024. This trend indicates a growing investment in operating assets over time.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals demonstrate a notable shift during the period. In 2021, accruals were negative at -1,454 million US dollars, decreasing to -908 million US dollars in 2022, indicating lower non-cash adjustments relative to cash flow. However, this trend reverses in 2023, with accruals becoming positive at 1,595 million US dollars and substantially increasing to 7,182 million US dollars in 2024. Such a positive and rising accruals figure could denote increasing non-cash earnings components or changes in working capital management.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio follows a similar pattern as aggregate accruals. It starts at a negative value of -3.29% in 2021, improving to -2.08% in 2022, which suggests a diminishing extent of negative accrual adjustments relative to net operating assets. The ratio turns positive in 2023 at 3.55%, then shows a pronounced increase to 14.32% in 2024. This rising ratio corroborates the increase in aggregate accruals and indicates a growing proportion of accruals in relation to net operating assets, which may impact earnings quality.