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.
Balance-Sheet-Based Accruals Ratio
Bed Bath & Beyond Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Feb 26, 2022 | Feb 27, 2021 | Feb 29, 2020 | Mar 2, 2019 | Mar 3, 2018 | Feb 25, 2017 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 5,130,572) | 6,456,930) | 7,790,515) | 6,570,541) | 7,040,806) | 6,846,029) | |
| Less: Cash and cash equivalents | 439,496) | 1,352,984) | 1,000,340) | 508,971) | 346,140) | 488,329) | |
| Less: Short term investment securities | —) | —) | 385,642) | 485,799) | 378,039) | —) | |
| Operating assets | 4,691,076) | 5,103,946) | 6,404,533) | 5,575,771) | 6,316,627) | 6,357,700) | |
| Operating Liabilities | |||||||
| Total liabilities | 4,956,427) | 5,179,994) | 6,025,580) | 4,010,210) | 4,152,178) | 4,126,752) | |
| Less: Current finance lease liabilities | 2,494) | —) | 1,541) | —) | —) | —) | |
| Less: Noncurrent finance lease liabilities | 35,447) | —) | 102,412) | 3,800) | 4,500) | 5,100) | |
| Less: Long term debt | 1,179,776) | 1,190,363) | 1,488,400) | 1,487,934) | 1,492,078) | 1,491,603) | |
| Operating liabilities | 3,738,710) | 3,989,631) | 4,433,227) | 2,518,476) | 2,655,600) | 2,630,049) | |
| Net operating assets1 | 952,366) | 1,114,315) | 1,971,306) | 3,057,295) | 3,661,027) | 3,727,651) | |
| Balance-sheet-based aggregate accruals2 | (161,949) | (856,991) | (1,085,989) | (603,732) | (66,624) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | -15.67% | -55.55% | -43.19% | -17.97% | -1.80% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Amazon.com Inc. | 32.91% | — | — | — | — | — | |
| Home Depot Inc. | 9.91% | — | — | — | — | — | |
| Lowe’s Cos. Inc. | 2.66% | — | — | — | — | — | |
| TJX Cos. Inc. | 73.65% | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Consumer Discretionary Distribution & Retail | 26.47% | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 13.04% | 200.00% | — | — | — | — | |
Based on: 10-K (reporting date: 2022-02-26), 10-K (reporting date: 2021-02-27), 10-K (reporting date: 2020-02-29), 10-K (reporting date: 2019-03-02), 10-K (reporting date: 2018-03-03), 10-K (reporting date: 2017-02-25).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 4,691,076 – 3,738,710 = 952,366
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 952,366 – 1,114,315 = -161,949
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -161,949 ÷ [(952,366 + 1,114,315) ÷ 2] = -15.67%
4 Click competitor name to see calculations.
The financial trajectory from 2018 to 2022 is characterized by a continuous contraction of the operating base and significant volatility in the relationship between accruals and net operating assets.
- Net Operating Assets
- A sustained downward trend is observed, with net operating assets declining from US$ 3,661,027 thousand in March 2018 to US$ 952,366 thousand by February 2022. This represents a substantial and consistent reduction in the scale of the operating balance sheet over the analyzed period.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals shifted deeply into negative territory between 2018 and 2020, reaching a minimum of negative US$ 1,085,989 thousand. A subsequent reversal began in 2021, with the values becoming less negative, ultimately reaching negative US$ 161,949 thousand by February 2022.
- Balance-sheet-based Accruals Ratio
- The accruals ratio exhibited extreme volatility, moving from a relatively stable -1.80% in 2018 to a peak negative of -55.55% in 2021. This precipitous decline suggests a widening divergence between cash flows and accrual-based accounting. A significant correction occurred in 2022, as the ratio returned to -15.67%, indicating a sharp moderation in the accruals relative to the remaining net operating assets.
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Cash-Flow-Statement-Based Accruals Ratio
Bed Bath & Beyond Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Feb 26, 2022 | Feb 27, 2021 | Feb 29, 2020 | Mar 2, 2019 | Mar 3, 2018 | Feb 25, 2017 | ||
|---|---|---|---|---|---|---|---|
| Net earnings (loss) | (559,623) | (150,773) | (613,816) | (137,224) | 424,858) | 685,108) | |
| Less: Net cash provided by operating activities | 17,854) | 268,108) | 590,941) | 918,278) | 859,689) | 1,041,788) | |
| Less: Net cash (used in) provided by investing activities | (349,182) | 737,880) | 91,376) | (509,682) | (674,412) | (491,929) | |
| Cash-flow-statement-based aggregate accruals | (228,295) | (1,156,761) | (1,296,133) | (545,820) | 239,581) | 135,249) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | -22.09% | -74.98% | -51.55% | -16.25% | 6.49% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Amazon.com Inc. | -8.54% | — | — | — | — | — | |
| Home Depot Inc. | 8.24% | — | — | — | — | — | |
| Lowe’s Cos. Inc. | -0.14% | — | — | — | — | — | |
| TJX Cos. Inc. | 55.57% | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Consumer Discretionary Distribution & Retail | -4.02% | 50.12% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 1.57% | 21.63% | — | — | — | — | |
Based on: 10-K (reporting date: 2022-02-26), 10-K (reporting date: 2021-02-27), 10-K (reporting date: 2020-02-29), 10-K (reporting date: 2019-03-02), 10-K (reporting date: 2018-03-03), 10-K (reporting date: 2017-02-25).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -228,295 ÷ [(952,366 + 1,114,315) ÷ 2] = -22.09%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality reveals a consistent contraction in the balance sheet and a significant shift in accrual patterns between March 2018 and February 2022. The period is characterized by a steady decline in net operating assets and a transition from positive to deeply negative cash-flow-statement-based accruals, peaking in magnitude in early 2021.
- Net Operating Assets Trend
- A continuous downward trajectory is observed in net operating assets, which decreased from 3,661,027 thousand US dollars in March 2018 to 952,366 thousand US dollars by February 2022. This represents a substantial reduction in the asset base over the five-year period, indicating a significant downsizing of operations or an aggressive liquidation of operating assets.
- Aggregate Accruals Analysis
- Cash-flow-statement-based aggregate accruals shifted from a positive 239,581 thousand US dollars in March 2018 to negative values starting in March 2019. The negative accruals accelerated sharply, reaching a trough of -1,296,133 thousand US dollars in February 2020 and remaining heavily negative at -1,156,761 thousand US dollars in February 2021, before moderating to -228,295 thousand US dollars in February 2022.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrors the aggregate accruals trend, moving from a positive 6.49% in March 2018 to an extreme negative peak of -74.98% in February 2021. Such a pronounced negative ratio typically suggests that cash flows from operations significantly exceeded accrual-based earnings, often associated with large non-cash charges, asset write-downs, or a rapid decrease in working capital. The ratio improved to -22.09% by February 2022, though it remained well below the initial 2018 levels.
The confluence of declining net operating assets and deeply negative accruals ratios suggests a period of significant financial restructuring or asset impairment. The intensification of negative accruals between 2019 and 2021 indicates that the reduction in the asset base was likely accompanied by substantial non-cash losses that outpaced operational cash generation during those fiscal years.
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