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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Colgate-Palmolive Co. pages available for free this week:
- Income Statement
- Balance Sheet: Liabilities and Stockholders’ Equity
- Common-Size Income Statement
- Analysis of Geographic Areas
- Enterprise Value to FCFF (EV/FCFF)
- Dividend Discount Model (DDM)
- Present Value of Free Cash Flow to Equity (FCFE)
- Operating Profit Margin since 2005
- Analysis of Revenues
- Analysis of Debt
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Balance-Sheet-Based Accruals Ratio
Colgate-Palmolive Co., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Notes and loans payable | ||||||
| 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 | ||||||
| Procter & Gamble Co. | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | ||||||
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 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= – =
3 2022 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 demonstrate a fluctuating trend over the four-year period. Starting at 7,522 million USD in 2019, it increased slightly to 7,814 million USD in 2020. This was followed by a decline to 7,384 million USD in 2021. However, there was a significant rebound in 2022, reaching 8,797 million USD, the highest value in the observed period.
- Balance-sheet-based Aggregate Accruals
- The balance-sheet-based aggregate accruals exhibit considerable volatility. The measure was relatively high at 1,685 million USD in 2019, sharply decreased to 292 million USD in 2020, and turned negative in 2021 at -430 million USD. This negative value indicates a reversal in accruals during that year. In 2022, the accruals returned to a positive value of 1,413 million USD, showing a strong recovery but not reaching the 2019 level.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrors the trends observed in aggregate accruals but in proportional terms relative to net operating assets. It starts high at 25.23% in 2019, drops significantly to 3.81% in 2020, becomes negative at -5.66% in 2021, indicating negative accruals relative to assets, and then rises again to 17.46% in 2022. Despite the recovery by 2022, the ratio remains below the initial 2019 figure, reflecting a partial normalization in accrual-based activities.
Cash-Flow-Statement-Based Accruals Ratio
Colgate-Palmolive Co., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | ||
|---|---|---|---|---|---|---|
| Net income attributable to Colgate-Palmolive Company | ||||||
| Less: Net cash provided by operations | ||||||
| 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 | ||||||
| Procter & Gamble Co. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | ||||||
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 × ÷ [( + ) ÷ 2] =
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibit fluctuations over the analyzed periods. Beginning at 7,522 million US dollars in 2019, the value increased to 7,814 million in 2020, then decreased to 7,384 million in 2021, followed by a notable rise to 8,797 million in 2022. This indicates variability in investment or asset base related to operations, with a significant increase in the latest year suggesting expansion or acquisition of operating assets.
- Cash-Flow-Statement-Based Aggregate Accruals
- This measure demonstrates considerable volatility. Starting from a positive 1,333 million US dollars in 2019, it sharply declined to negative 245 million in 2020 and further decreased to negative 567 million in 2021, before rebounding to a positive 830 million in 2022. The downward trend in 2020 and 2021 suggests a period of lower accruals relative to cash flows, potentially indicating more conservative earnings recognition or reduction in non-cash items. The recovery in 2022 may reflect changes in accounting estimates or improved earnings quality.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrors the trends in aggregate accruals. Starting high at 19.96% in 2019, it turns negative at -3.20% in 2020 and further declines to -7.46% in 2021, then rises back to a positive 10.26% in 2022. The negative ratios in 2020 and 2021 indicate that accruals were reducing earnings compared to cash flows, which might point to conservative accounting or timing differences. The positive movement in 2022 suggests a shift towards higher accruals relative to cash flows, potentially impacting reported earnings quality and timing.