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
Ulta Beauty Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Jan 28, 2023 | Jan 29, 2022 | Jan 30, 2021 | Feb 1, 2020 | Feb 2, 2019 | Feb 3, 2018 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 5,370,411) | 4,764,379) | 5,089,969) | 4,863,872) | 3,191,172) | 2,908,687) | |
| Less: Cash and cash equivalents | 737,877) | 431,560) | 1,046,051) | 392,325) | 409,251) | 277,445) | |
| Less: Short-term investments | —) | —) | —) | 110,000) | —) | 120,000) | |
| Operating assets | 4,632,534) | 4,332,819) | 4,043,918) | 4,361,547) | 2,781,921) | 2,511,242) | |
| Operating Liabilities | |||||||
| Total liabilities | 3,410,600) | 3,229,006) | 3,090,420) | 2,961,778) | 1,370,954) | 1,134,470) | |
| Operating liabilities | 3,410,600) | 3,229,006) | 3,090,420) | 2,961,778) | 1,370,954) | 1,134,470) | |
| Net operating assets1 | 1,221,934) | 1,103,813) | 953,498) | 1,399,769) | 1,410,967) | 1,376,772) | |
| Balance-sheet-based aggregate accruals2 | 118,121) | 150,315) | (446,271) | (11,198) | 34,195) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 10.16% | 14.61% | -37.93% | -0.80% | 2.45% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Amazon.com Inc. | 18.01% | 32.91% | — | — | — | — | |
| Home Depot Inc. | 15.25% | 9.91% | — | — | — | — | |
| Lowe’s Cos. Inc. | -2.92% | 2.66% | — | — | — | — | |
| TJX Cos. Inc. | 30.23% | 73.65% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Consumer Discretionary Distribution & Retail | 16.15% | 26.47% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 12.01% | 13.04% | 200.00% | — | — | — | |
Based on: 10-K (reporting date: 2023-01-28), 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).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 4,632,534 – 3,410,600 = 1,221,934
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 1,221,934 – 1,103,813 = 118,121
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 118,121 ÷ [(1,221,934 + 1,103,813) ÷ 2] = 10.16%
4 Click competitor name to see calculations.
The analysis of financial reporting quality reveals significant volatility in the relationship between reported earnings and cash flows over the five-year period. The most prominent feature of this trend is a sharp divergence in 2021, followed by a partial return to baseline levels in subsequent years.
- Net Operating Assets Trend
- Net operating assets exhibited relative stability between 2019 and 2020, remaining near US$ 1.4 billion. A substantial contraction occurred in 2021, with assets falling to US$ 953.5 million. A recovery phase followed, with assets increasing to US$ 1.1 billion in 2022 and US$ 1.22 billion in 2023, although they remained below 2019 levels.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals shifted from a positive US$ 34.2 million in 2019 to a significant negative value of US$ -446.3 million in 2021. This deep negative accrual suggests a period where cash flow from operations significantly exceeded reported net income. This trend reversed in 2022 and 2023, with accruals returning to positive values of US$ 150.3 million and US$ 118.1 million, respectively.
- Balance-Sheet-Based Accruals Ratio Analysis
- The accruals ratio demonstrates extreme fluctuation, moving from a low positive 2.45% in 2019 to an anomalous -37.93% in 2021. Such a sharp negative ratio typically indicates high earnings quality through conservatism or the impact of significant non-cash write-downs. The subsequent rise to 14.61% in 2022 and 10.16% in 2023 indicates that accruals now represent a larger proportion of net operating assets than they did prior to 2021, suggesting a shift in the composition of reported earnings.
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Cash-Flow-Statement-Based Accruals Ratio
Ulta Beauty Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Jan 28, 2023 | Jan 29, 2022 | Jan 30, 2021 | Feb 1, 2020 | Feb 2, 2019 | Feb 3, 2018 | ||
|---|---|---|---|---|---|---|---|
| Net income | 1,242,408) | 985,837) | 175,835) | 705,945) | 658,559) | 555,234) | |
| Less: Net cash provided by operating activities | 1,481,915) | 1,059,265) | 810,355) | 1,101,293) | 956,127) | 779,366) | |
| Less: Net cash used in investing activities | (314,584) | (176,484) | (48,751) | (471,480) | (215,107) | (530,714) | |
| Cash-flow-statement-based aggregate accruals | 75,077) | 103,056) | (585,769) | 76,132) | (82,461) | 306,582) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 6.46% | 10.02% | -49.78% | 5.42% | -5.92% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Amazon.com Inc. | -2.63% | -8.54% | — | — | — | — | |
| Home Depot Inc. | 14.43% | 8.24% | — | — | — | — | |
| Lowe’s Cos. Inc. | -4.62% | -0.14% | — | — | — | — | |
| TJX Cos. Inc. | 23.97% | 55.57% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Consumer Discretionary Distribution & Retail | 0.41% | -4.02% | 50.12% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 4.25% | 1.57% | 21.63% | — | — | — | |
Based on: 10-K (reporting date: 2023-01-28), 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).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 75,077 ÷ [(1,221,934 + 1,103,813) ÷ 2] = 6.46%
2 Click competitor name to see calculations.
The analysis of aggregate accruals reveals a period of significant volatility in financial reporting quality, characterized by a substantial divergence between accrual-based earnings and cash flows, particularly during the 2021 fiscal year.
- Net Operating Assets Trend
- Net operating assets remained relatively stable through 2020 before experiencing a sharp contraction in 2021, falling to 953,498 thousand US dollars. A recovery trend is observed in the subsequent two years, with assets increasing to 1,103,813 thousand US dollars in 2022 and further reaching 1,221,934 thousand US dollars by 2023.
- Accruals Ratio Volatility
- The cash-flow-statement-based accruals ratio exhibited extreme fluctuations, moving from -5.92% in 2019 to 5.42% in 2020. A significant anomaly occurred in 2021, where the ratio declined sharply to -49.78%. This indicates that cash flows from operations far exceeded accrual-based net income, a pattern typically associated with large non-cash charges or impairment losses that reduce reported earnings without impacting cash reserves.
- Earnings Quality Stabilization
- Following the volatility of 2021, the accruals ratio returned to positive territory, peaking at 10.02% in 2022 before moderating to 6.46% in 2023. This reversal suggests a normalization of the relationship between reported accounting profits and actual cash generation, indicating a shift back toward more stable financial reporting quality in the most recent periods.
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