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
AutoZone Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Aug 26, 2023 | Aug 27, 2022 | Aug 28, 2021 | Aug 29, 2020 | Aug 31, 2019 | Aug 25, 2018 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 15,985,878) | 15,275,043) | 14,516,199) | 14,423,872) | 9,895,913) | 9,346,980) | |
| Less: Cash and cash equivalents | 277,054) | 264,380) | 1,171,335) | 1,750,815) | 176,300) | 217,824) | |
| Less: Current marketable debt securities | 39,639) | 49,768) | 46,007) | 76,118) | 67,958) | 59,444) | |
| Operating assets | 15,669,185) | 14,960,895) | 13,298,857) | 12,596,939) | 9,651,655) | 9,069,712) | |
| Operating Liabilities | |||||||
| Total liabilities | 20,335,772) | 18,813,956) | 16,313,735) | 15,301,849) | 11,609,764) | 10,867,335) | |
| Less: Current portion of finance lease liabilities | 86,916) | 92,877) | 89,932) | 67,498) | 56,246) | 52,290) | |
| Less: Long-term debt | 7,668,549) | 6,122,092) | 5,269,820) | 5,513,371) | 5,206,344) | 5,005,930) | |
| Less: Finance lease liabilities, less current portion | 200,702) | 217,428) | 186,122) | 155,855) | 123,659) | 102,013) | |
| Operating liabilities | 12,379,605) | 12,381,559) | 10,767,861) | 9,565,125) | 6,223,515) | 5,707,102) | |
| Net operating assets1 | 3,289,580) | 2,579,336) | 2,530,996) | 3,031,814) | 3,428,140) | 3,362,610) | |
| Balance-sheet-based aggregate accruals2 | 710,244) | 48,340) | (500,818) | (396,326) | 65,530) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 24.20% | 1.89% | -18.01% | -12.27% | 1.93% | — | |
| 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: 2023-08-26), 10-K (reporting date: 2022-08-27), 10-K (reporting date: 2021-08-28), 10-K (reporting date: 2020-08-29), 10-K (reporting date: 2019-08-31), 10-K (reporting date: 2018-08-25).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 15,669,185 – 12,379,605 = 3,289,580
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 3,289,580 – 2,579,336 = 710,244
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 710,244 ÷ [(3,289,580 + 2,579,336) ÷ 2] = 24.20%
4 Click competitor name to see calculations.
The analysis of financial reporting quality reveals significant volatility in the balance-sheet-based accruals ratio over the five-year period ending August 26, 2023. A cyclical pattern is evident, characterized by a period of negative accruals followed by a sharp increase in the most recent fiscal year.
- Net Operating Assets Trend
- Net operating assets experienced a steady decline from US$ 3,428,140 thousand in 2019 to a trough of US$ 2,530,996 thousand in 2021. This downward trend reversed after 2021, with a substantial increase to US$ 3,289,580 thousand by August 26, 2023, nearly returning to the 2019 baseline.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals shifted from a modest positive position in 2019 to significant negative values in 2020 and 2021, reaching a low of negative US$ 500,818 thousand. A reversal occurred in 2022, culminating in a peak of US$ 710,244 thousand in 2023, representing a substantial swing in the relationship between reported earnings and cash flows.
- Accruals Ratio Analysis
- The accruals ratio mirrored the volatility of aggregate accruals, descending from 1.93% in 2019 to -18.01% in 2021. This negative phase suggests a period where cash flow from operations likely exceeded reported accounting earnings. However, the ratio climbed rapidly to 24.20% by 2023. This sharp ascent indicates that a larger portion of current earnings is derived from non-cash accruals relative to net operating assets, which typically signals a decrease in the immediate quality of earnings compared to the 2020-2022 period.
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Cash-Flow-Statement-Based Accruals Ratio
AutoZone Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Aug 26, 2023 | Aug 27, 2022 | Aug 28, 2021 | Aug 29, 2020 | Aug 31, 2019 | Aug 25, 2018 | ||
|---|---|---|---|---|---|---|---|
| Net income | 2,528,426) | 2,429,604) | 2,170,314) | 1,732,972) | 1,617,221) | 1,337,536) | |
| Less: Net cash provided by operating activities | 2,940,788) | 3,211,135) | 3,518,543) | 2,720,108) | 2,128,513) | 2,080,292) | |
| Less: Net cash used in investing activities | (876,178) | (648,099) | (601,778) | (497,875) | (491,846) | (521,860) | |
| Cash-flow-statement-based aggregate accruals | 463,816) | (133,432) | (746,451) | (489,261) | (19,446) | (220,896) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 15.81% | -5.22% | -26.84% | -15.15% | -0.57% | — | |
| 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: 2023-08-26), 10-K (reporting date: 2022-08-27), 10-K (reporting date: 2021-08-28), 10-K (reporting date: 2020-08-29), 10-K (reporting date: 2019-08-31), 10-K (reporting date: 2018-08-25).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 463,816 ÷ [(3,289,580 + 2,579,336) ÷ 2] = 15.81%
2 Click competitor name to see calculations.
An analysis of the aggregate accruals and net operating assets reveals a period of significant volatility in financial reporting quality metrics between 2019 and 2023. The relationship between reported earnings and cash flows shifted from a state of near-equilibrium to a period of substantial negative accruals, concluding with a pivot to positive accruals in the most recent fiscal year.
- Net Operating Assets Trend
- Net operating assets experienced a consistent decline from August 31, 2019, through August 28, 2021, falling from 3,428,140 thousand US$ to 2,530,996 thousand US$. This downward trend reversed in 2022 and accelerated in 2023, with assets reaching 3,289,580 thousand US$ by August 26, 2023, nearly returning to 2019 levels.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals shifted from a negligible negative position of -19,446 thousand US$ in 2019 to a significant deficit of -746,451 thousand US$ by 2021. Following this trough, accruals moderated to -133,432 thousand US$ in 2022 before transitioning to a positive value of 463,816 thousand US$ in 2023. This transition indicates a reversal in the gap between accrual-based accounting and actual cash flow generation.
- Cash-Flow-Statement-Based Accruals Ratio
- The accruals ratio mirrors the volatility of the aggregate accruals. Starting at -0.57% in 2019, the ratio declined sharply to -15.15% in 2020 and reached a low of -26.84% in 2021. This period of deeply negative ratios suggests that cash flows from operations significantly exceeded accrual earnings relative to the asset base. However, a rapid correction occurred, with the ratio improving to -5.22% in 2022 and ending at a positive 15.81% in 2023. This shift to a positive ratio indicates that accrual earnings have surpassed cash flows in the most recent period.
The overall trajectory suggests a cyclical movement in earnings quality. The period between 2020 and 2022 was characterized by high cash-flow relative to earnings, while the 2023 results demonstrate a shift toward accrual-heavy earnings, which typically warrants closer monitoring for potential future earnings reversals.
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