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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Philip Morris International Inc. pages available for free this week:
- Balance Sheet: Liabilities and Stockholders’ Equity
- Common-Size Balance Sheet: Assets
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Solvency Ratios
- Analysis of Short-term (Operating) Activity Ratios
- Analysis of Geographic Areas
- Common Stock Valuation Ratios
- Enterprise Value to FCFF (EV/FCFF)
- Price to Book Value (P/BV) since 2008
- Analysis of Revenues
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Balance-Sheet-Based Accruals Ratio
Philip Morris International Inc., 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 | ||||||
| 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 | ||||||
| Coca-Cola Co. | ||||||
| Mondelēz International Inc. | ||||||
| PepsiCo Inc. | ||||||
| Balance-Sheet-Based Accruals Ratio, Sector | ||||||
| Food, Beverage & Tobacco | ||||||
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | ||||||
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 exhibit an overall increasing trend from 15,102 million US dollars in 2021 to 35,403 million in 2023, followed by a decline to 31,609 million in 2024. This indicates growing operational asset investments or retained earnings until 2023, and a reduction or disposal of assets in 2024.
- Balance-sheet-based aggregate accruals
- Aggregate accruals show significant volatility over the period. Starting at 1,477 million in 2021, there is a sharp increase to 18,503 million in 2022, which is unusually high compared to other years. This is followed by a sharp decrease to 1,798 million in 2023 and a reversal to a negative value of -3,794 million in 2024. Such fluctuations suggest changes in the timing of revenue and expense recognition or potential one-off adjustments affecting accrual accounting.
- Balance-sheet-based accruals ratio
- The accruals ratio as a percentage of net operating assets follows a parallel pattern to aggregate accruals, climbing from 10.28% in 2021 to an extremely elevated 75.98% in 2022. Subsequently, it decreases sharply to 5.21% in 2023 and turns negative at -11.32% in 2024. The high ratio in 2022 could indicate aggressive accrual accounting or a one-time event influencing earnings quality, while the negative ratio in 2024 may reflect reversals or reductions in accrued liabilities or revenues.
Cash-Flow-Statement-Based Accruals Ratio
Philip Morris International Inc., 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 attributable to PMI | ||||||
| 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 | ||||||
| Coca-Cola Co. | ||||||
| Mondelēz International Inc. | ||||||
| PepsiCo Inc. | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Sector | ||||||
| Food, Beverage & Tobacco | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | ||||||
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 exhibited significant growth from 2021 to 2023, increasing from 15,102 million US dollars to 35,403 million US dollars. This represents a more than twofold increase over two years. However, in 2024, there was a noticeable decline to 31,609 million US dollars, indicating a partial reversal of the prior upward trend.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals based on the cash flow statement showed considerable volatility. In 2021, the value was negative at -500 million US dollars, suggesting net cash flows exceeded accruals. There was a sharp increase in 2022 to 13,924 million US dollars, followed by a substantial decrease to 2,207 million US dollars in 2023. The figure turned negative again in 2024 to -4,068 million US dollars. The fluctuation indicates inconsistent accrual activity relative to cash flow across the four-year period.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio, representing the proportion of accruals relative to cash flows, also showed pronounced changes. It moved from a negative value of -3.48% in 2021 to a peak of 57.17% in 2022, indicating a substantial increase in accruals relative to cash flows during that year. The ratio then decreased to 6.4% in 2023 and turned negative again to -12.14% in 2024. These shifts point to significant fluctuations in the quality of earnings, with 2022 exhibiting a notably elevated accrual level compared to other years.