Cigna’s Real ROA Misdiagnosed By GAAP

May 31, 2019


  • CI’s adjusted return on assets is projected to fall from 2014 8% levels to 6% in 2015 – still higher than the traditional sub-cost-of-capital ROA most financial databases report.
  • One culprit behind this major distortion is GAAP accounting for goodwill, which amounted to $6.0bn – this large figure leads to a significant distortion of the firm’s economic reality.
  • Another reason behind Valens’s significantly higher ROA’ is CI’s adjusted cash from operations of $3.34bn, much higher than as-reported cash flow from operations of only $1.99bn.

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Under Generally Accepted Accounting Principles (GAAP), as-reported financial statements and financial ratios of Cigna Corporation do not reflect economic reality. The traditional return on assets computation understates the company’s profitability by incorrectly including certain items. In the case of CI, the inclusion of goodwill ($6.0bn) inflates their assets, resulting in a distortion of performance measures.

After adjusting for those issues and a host of other GAAP-based mis-categorizations, Valens calculates CI’s adjusted return on assets as 8% in 2014. In contrast, most financial databases show a traditional ROA of only 4%. Additionally, analysis shows that CI’s as-reported cash flow from operations was $1.99bn for 2014 when, in economic reality, CI’s adjusted cash from operations was almost twice that at $3.34bn. The profitability of CI’s operations is therefore not what traditional metrics might suggest.

The problem with GAAP is that they create inconsistencies when comparing one company to another, and from comparing a company to itself from year to year. By making adjustments, we aim to remove the financial statement distortions and mis-categorizations of Generally Accepted Accounting Principles. Some of these can be automated through consistently applied formula; however, many must be made manually. Manual adjustments that cannot be automated include mergers and acquisitions accounting, special charges, business impairments, and others. The practice of creating consistent, apples-to-apples comparable measures of financial performance is often considered either tedious or overly complex by even seasoned financial analysts.

Click here to read the article in its entirety at Seeking Alpha.

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