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
Dollar Tree Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Jan 29, 2022 | Jan 30, 2021 | Feb 1, 2020 | Feb 2, 2019 | Feb 3, 2018 | Jan 28, 2017 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 21,721,800) | 20,696,000) | 19,574,600) | 13,501,200) | 16,332,800) | 15,701,600) | |
| Less: Cash and cash equivalents | 984,900) | 1,416,700) | 539,200) | 422,100) | 1,097,800) | 866,400) | |
| Less: Short-term investments | —) | —) | —) | —) | —) | 4,000) | |
| Operating assets | 20,736,900) | 19,279,300) | 19,035,400) | 13,079,100) | 15,235,000) | 14,831,200) | |
| Operating Liabilities | |||||||
| Total liabilities | 14,003,300) | 13,410,700) | 13,319,800) | 7,858,300) | 9,150,500) | 10,312,100) | |
| Less: Current portion of long-term debt | —) | —) | 250,000) | —) | 915,900) | 152,100) | |
| Less: Long-term debt, net, excluding current portion | 3,417,000) | 3,226,200) | 3,522,200) | 4,265,300) | 4,762,100) | 6,169,700) | |
| Operating liabilities | 10,586,300) | 10,184,500) | 9,547,600) | 3,593,000) | 3,472,500) | 3,990,300) | |
| Net operating assets1 | 10,150,600) | 9,094,800) | 9,487,800) | 9,486,100) | 11,762,500) | 10,840,900) | |
| Balance-sheet-based aggregate accruals2 | 1,055,800) | (393,000) | 1,700) | (2,276,400) | 921,600) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 10.97% | -4.23% | 0.02% | -21.43% | 8.15% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Costco Wholesale Corp. | 20.71% | — | — | — | — | — | |
| Target Corp. | 10.33% | — | — | — | — | — | |
| Walmart Inc. | 1.09% | — | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Consumer Staples Distribution & Retail | 4.30% | 200.00% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Consumer Staples | 7.61% | 200.00% | — | — | — | — | |
Based on: 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03), 10-K (reporting date: 2017-01-28).
1 2022 Calculation
Net operating assets = Operating assets – Operating liabilities
= 20,736,900 – 10,586,300 = 10,150,600
2 2022 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2022 – Net operating assets2021
= 10,150,600 – 9,094,800 = 1,055,800
3 2022 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,055,800 ÷ [(10,150,600 + 9,094,800) ÷ 2] = 10.97%
4 Click competitor name to see calculations.
The financial data exhibits significant volatility in balance-sheet-based accruals and the corresponding accruals ratio over the five-year period ending January 29, 2022. While net operating assets experienced a period of contraction followed by a recovery, the accruals ratio fluctuated sharply between positive and negative values, indicating substantial shifts in the relationship between reported accounting earnings and cash flows.
- Net Operating Assets Trend
- Net operating assets showed a general decline from February 3, 2018, where they stood at US$ 11.76 billion, reaching a low of US$ 9.09 billion by January 30, 2021. A recovery is observed in the final period ending January 29, 2022, with assets increasing to US$ 10.15 billion.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals demonstrate extreme instability. A positive value of US$ 921.6 million in 2018 shifted to a significant negative US$ 2.28 billion in 2019. This was followed by a near-total neutralization to US$ 1.7 million in 2020, a further dip to negative US$ 393 million in 2021, and a return to positive territory at US$ 1.06 billion in 2022.
- Accruals Ratio Interpretation
- The balance-sheet-based accruals ratio mirrored the volatility of aggregate accruals, fluctuating from 8.15% in 2018 to -21.43% in 2019. The ratio remained low or negative in 2020 (0.02%) and 2021 (-4.23%) before rising to 10.97% in 2022. These wide swings suggest inconsistent reporting quality or significant operational adjustments that decoupled accrual-based earnings from cash-based results across the observed timeframe.
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Cash-Flow-Statement-Based Accruals Ratio
Dollar Tree Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Jan 29, 2022 | Jan 30, 2021 | Feb 1, 2020 | Feb 2, 2019 | Feb 3, 2018 | Jan 28, 2017 | ||
|---|---|---|---|---|---|---|---|
| Net income (loss) | 1,327,900) | 1,341,900) | 827,000) | (1,590,800) | 1,714,300) | 896,200) | |
| Less: Net cash provided by operating activities | 1,431,500) | 2,716,300) | 1,869,800) | 1,766,000) | 1,510,200) | 1,673,300) | |
| Less: Net cash used in investing activities | (1,019,900) | (889,700) | (1,020,200) | (816,700) | (627,900) | (483,600) | |
| Cash-flow-statement-based aggregate accruals | 916,300) | (484,700) | (22,600) | (2,540,100) | 832,000) | (293,500) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 9.52% | -5.22% | -0.24% | -23.91% | 7.36% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Costco Wholesale Corp. | 14.69% | — | — | — | — | — | |
| Target Corp. | 7.52% | — | — | — | — | — | |
| Walmart Inc. | -3.77% | — | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Consumer Staples Distribution & Retail | -0.42% | -21.72% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Consumer Staples | 4.81% | -9.79% | — | — | — | — | |
Based on: 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03), 10-K (reporting date: 2017-01-28).
1 2022 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 916,300 ÷ [(10,150,600 + 9,094,800) ÷ 2] = 9.52%
2 Click competitor name to see calculations.
The analysis of financial reporting quality reveals significant volatility in the relationship between accrual-based earnings and cash flows over the five-year period ending January 29, 2022. This volatility is characterized by sharp fluctuations in both the absolute magnitude of aggregate accruals and the resulting accruals ratio.
- Net Operating Assets Trend
- Net operating assets showed a general downward trajectory from February 3, 2018, when they stood at US$ 11.76 billion, decreasing to a low of approximately US$ 9.09 billion by January 30, 2021. A recovery was observed in the final period, with assets rising to US$ 10.15 billion by January 29, 2022.
- Aggregate Accruals Performance
- Cash-flow-statement-based aggregate accruals exhibited extreme variance. A positive balance of US$ 832 million in 2018 shifted abruptly to a substantial negative balance of US$ 2.54 billion in 2019. Accruals remained in negative territory through 2021, though they converged toward zero in 2020 (-US$ 22.6 million) before returning to a positive position of US$ 916.3 million in 2022.
- Accruals Ratio Analysis
- The accruals ratio reflected this instability, swinging from 7.36% in 2018 to a sharp low of -23.91% in 2019. The ratio remained negative through the subsequent two years, reaching -0.24% in 2020 and -5.22% in 2021. The period concluded with a significant reversal to a positive 9.52% in 2022. The deep negative ratio in 2019 indicates a period where cash flows significantly outperformed accrual earnings, while the return to a positive ratio in 2022 suggests that accrual-based earnings once again exceed cash flow generation.
Overall, the patterns suggest a period of significant adjustment in reporting quality between 2019 and 2021, followed by a return to accrual patterns similar to those observed at the start of the analyzed period.
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