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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- Analysis of Liquidity Ratios
- Analysis of Solvency Ratios
- Analysis of Long-term (Investment) Activity Ratios
- Analysis of Reportable Segments
- Enterprise Value to FCFF (EV/FCFF)
- Price to FCFE (P/FCFE)
- Capital Asset Pricing Model (CAPM)
- Debt to Equity since 2005
- Total Asset Turnover since 2005
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
CVS Health Corp., 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 | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Short-term debt | ||||||
| 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 | ||||||
| Abbott Laboratories | ||||||
| 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 an overall increasing trend over the observed period. Starting from approximately US$119.0 billion at the end of 2021, there was a dip in 2022 to roughly US$107.8 billion. However, this was followed by a recovery and growth to US$126.8 billion in 2023 and further to US$131.0 billion in 2024. This pattern indicates a strengthening asset base after the initial decline.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals exhibited significant volatility during the period considered. In 2021, the accruals were negative at approximately US$-4.5 billion, which deepened markedly in 2022 to about US$-11.2 billion, indicating increased non-cash adjustments negatively impacting earnings quality. A marked reversal occurred in 2023, when accruals swung to a positive US$18.9 billion, followed by a decrease to US$4.2 billion in 2024. This swing reflects considerable fluctuations in earnings adjustments, potentially signifying changes in accounting policies or operational factors affecting accruals.
- Balance-Sheet-Based Accruals Ratio
- The accruals ratio, representing the proportion of accruals to net operating assets, followed a similar volatile trajectory. Initially negative at -3.68% in 2021, it declined further to -9.86% in 2022, suggesting an increasing magnitude of accruals relative to operating assets, potentially raising concerns about earnings quality. In 2023, this ratio reversed sharply to a positive 16.15%, indicating an unusual increase in accruals compared to the asset base. In 2024, the ratio moderated to 3.27%, still positive but substantially reduced, which may reflect normalization or stabilization of accrual levels relative to assets.
- Summary
- The data reveals notable fluctuations in both the absolute and relative measures of accruals, with a pronounced shift from negative to positive values between 2022 and 2023. The net operating assets, after an initial decline, showed consistent growth, suggesting expansion or enhanced asset utilization. The significant volatility in accruals and the accruals ratio could indicate changes in earnings quality and accounting adjustments that merit further detailed investigation to understand underlying causes and potential impacts on financial performance and reliability.
Cash-Flow-Statement-Based Accruals Ratio
CVS Health Corp., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2024 | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net income attributable to CVS Health | ||||||
| Less: Net cash provided by 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 | ||||||
| Abbott Laboratories | ||||||
| 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 demonstrate a fluctuating but generally increasing trend over the observed period. Initially, there was a decline from 119,032 million USD at the end of 2021 to 107,846 million USD by the end of 2022. This was followed by a substantial recovery and growth in the subsequent years, reaching 126,791 million USD in 2023 and further rising to 131,007 million USD in 2024. This pattern suggests a possible strategic reinvestment or expansion after an initial reduction in net operating assets.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals showed negative values in 2021 and 2022, with an increasing magnitude of negative accruals reaching -6,981 million USD in 2022 from -5,094 million USD in 2021. Notably, there was a significant reversal in 2023, where accruals sharply increased to a positive 15,807 million USD, before decreasing again to 3,120 million USD in 2024. This reversal indicates a major shift in the recognition or timing of revenues and expenses, suggesting variations in earnings quality or operational adjustments during this period.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio aligns with the movements observed in aggregate accruals, beginning with negative values of -4.2% and -6.15% in 2021 and 2022, respectively. A pronounced positive shift occurred in 2023, with the ratio increasing to 13.47%, indicating a significant proportion of earnings represented by accruals rather than actual cash flows. In 2024, the ratio declined to 2.42%, signaling a moderation from the previous year but still reflecting a positive accrual component.