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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- Statement of Comprehensive Income
- Balance Sheet: Liabilities and Stockholders’ Equity
- Common-Size Balance Sheet: Assets
- Analysis of Reportable Segments
- Common Stock Valuation Ratios
- Capital Asset Pricing Model (CAPM)
- Dividend Discount Model (DDM)
- Net Profit Margin since 2011
- Return on Assets (ROA) since 2011
- Total Asset Turnover since 2011
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Balance-Sheet-Based Accruals Ratio
HCA Healthcare Inc., balance sheet computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | ||||||
| Less: Cash and cash equivalents | ||||||
| Operating assets | ||||||
| Operating Liabilities | ||||||
| Total liabilities | ||||||
| Less: Long-term debt due within one year | ||||||
| Less: Long-term debt due after one year, less debt issuance costs and discounts | ||||||
| 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 | ||||||
| CVS Health Corp. | ||||||
| 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: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Net operating assets = Operating assets – Operating liabilities
= – =
2 2021 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2021 – Net operating assets2020
= – =
3 2021 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 generally increasing trend over the observed period. Starting from 29,401 million US dollars in 2018, the value rose to 32,536 million in 2019, slightly decreased to 32,103 million in 2020, and subsequently increased again to reach 34,617 million in 2021. This indicates overall growth in operating resources, with only a minor dip recorded in 2020.
- Balance-sheet-based Aggregate Accruals
- The aggregate accruals exhibit a volatile pattern. There was a significant increase from 2,070 million in 2018 to 3,135 million in 2019, followed by a sharp reversal to a negative figure of -433 million in 2020. This suggests a substantial write-down or reversal of accruals during that year. In 2021, aggregate accruals rebounded to 2,514 million, indicating a return to positive accrual accumulation.
- Balance-sheet-based Accruals Ratio
- The accruals ratio mirrors the volatility seen in aggregate accruals. It increased from 7.3% in 2018 to a peak of 10.12% in 2019, before plunging to a negative ratio of -1.34% in 2020. This negative ratio corresponds to the negative accrual amount and suggests a potential adjustment or correction in financial reporting during that year. By 2021, the ratio reverted to a positive 7.54%, close to the 2018 level, indicating normalization of accruals relative to net operating assets.
Cash-Flow-Statement-Based Accruals Ratio
HCA Healthcare Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | ||
|---|---|---|---|---|---|---|
| Net income attributable to HCA Healthcare, Inc. | ||||||
| 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 | ||||||
| CVS Health Corp. | ||||||
| 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: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 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 showed a generally upward trend over the four-year period. Starting at US$29,401 million at the end of 2018, the figure increased to US$32,536 million in 2019, experienced a slight decrease to US$32,103 million in 2020, and subsequently rose to US$34,617 million by the end of 2021. This pattern suggests steady growth in operating asset base with a minor contraction during 2020.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals exhibited considerable volatility throughout the observed years. The accruals increased from US$927 million in 2018 to US$1,623 million in 2019, indicating a rise in non-cash accounting adjustments relative to cash flow. In 2020, there was a pronounced reversal, with accruals falling sharply to -US$2,085 million, reflecting significant changes perhaps due to extraordinary or non-recurring items. In 2021, accruals returned to a positive value of US$640 million, suggesting normalization or adjustment following the prior year’s anomaly.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, representing the proportion of accruals relative to net operating assets, reflects the volatility seen in aggregate accruals more distinctly. The ratio rose from 3.27% in 2018 to 5.24% in 2019, indicating an increasing degree of accrual-based adjustments relative to asset size. In 2020, the ratio dropped significantly to -6.45%, consistent with the large negative aggregate accruals noted prior, pointing to substantial accounting changes affecting reported earnings quality. By 2021, the ratio moderated to 1.92%, suggesting a return toward typical levels of accrual activity relative to assets.
- Overall Assessment
- The financial reporting quality metrics reveal significant fluctuations in accrual accounting between 2018 and 2021. The net operating assets generally expanded, reflecting a growth in operational scale. However, the sharp swings in aggregate accruals and the accruals ratio, particularly the negative spike in 2020, may indicate periods of earnings management or exceptional accounting adjustments. The reversion toward more moderate accrual levels in 2021 implies possible stabilization in reporting quality following the disturbances seen in 2020.