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
Deckers Outdoor Corp., balance sheet computation of aggregate accruals
US$ in thousands
| Mar 31, 2023 | Mar 31, 2022 | Mar 31, 2021 | Mar 31, 2020 | Mar 31, 2019 | Mar 31, 2018 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 2,556,203) | 2,332,250) | 2,167,705) | 1,765,118) | 1,427,206) | 1,264,379) | |
| Less: Cash and cash equivalents | 981,795) | 843,527) | 1,089,361) | 649,436) | 589,692) | 429,970) | |
| Operating assets | 1,574,408) | 1,488,723) | 1,078,344) | 1,115,682) | 837,514) | 834,409) | |
| Operating Liabilities | |||||||
| Total liabilities | 790,470) | 793,425) | 723,480) | 624,998) | 382,076) | 323,600) | |
| Less: Short-term borrowings | —) | —) | —) | 638) | 603) | 578) | |
| Less: Mortgage payable | —) | —) | —) | 30,263) | 30,901) | 31,504) | |
| Operating liabilities | 790,470) | 793,425) | 723,480) | 594,097) | 350,572) | 291,518) | |
| Net operating assets1 | 783,938) | 695,298) | 354,864) | 521,585) | 486,942) | 542,891) | |
| Balance-sheet-based aggregate accruals2 | 88,640) | 340,434) | (166,721) | 34,643) | (55,949) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 11.98% | 64.83% | -38.04% | 6.87% | -10.87% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| lululemon athletica inc. | 29.58% | 4.99% | — | — | — | — | |
| Nike Inc. | 4.61% | 29.40% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Consumer Durables & Apparel | 7.77% | 26.37% | 200.00% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 12.01% | 13.04% | 200.00% | — | — | — | |
Based on: 10-K (reporting date: 2023-03-31), 10-K (reporting date: 2022-03-31), 10-K (reporting date: 2021-03-31), 10-K (reporting date: 2020-03-31), 10-K (reporting date: 2019-03-31), 10-K (reporting date: 2018-03-31).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 1,574,408 – 790,470 = 783,938
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 783,938 – 695,298 = 88,640
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 88,640 ÷ [(783,938 + 695,298) ÷ 2] = 11.98%
4 Click competitor name to see calculations.
The financial data reveals significant volatility in the balance-sheet-based accruals ratio over the five-year period ending March 31, 2023. While net operating assets demonstrated an overall growth trajectory despite a temporary contraction, the accruals ratio exhibited sharp oscillations, indicating substantial fluctuations in the relationship between reported earnings and cash flow.
- Net Operating Assets Trend
- Net operating assets grew from 486,942 thousand US$ in 2019 to 521,585 thousand US$ in 2020, before experiencing a contraction to 354,864 thousand US$ in 2021. A rapid expansion followed, with assets increasing to 695,298 thousand US$ in 2022 and further rising to 783,938 thousand US$ by 2023.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals showed an inconsistent pattern, alternating between negative and positive values. A significant negative peak occurred in 2021 at -166,721 thousand US$, which was followed by a sharp reversal to a positive peak of 340,434 thousand US$ in 2022, before moderating to 88,640 thousand US$ in 2023.
- Accruals Ratio Interpretation
- The accruals ratio mirrors the volatility of aggregate accruals, swinging from -38.04% in 2021 to 64.83% in 2022. The deep negative ratio in 2021 indicates a period where cash flows significantly exceeded accrual-based earnings. Conversely, the high positive ratio in 2022 suggests a period where earnings were heavily driven by non-cash accruals. By 2023, the ratio normalized to 11.98%, suggesting a reduction in the disparity between reported accounting profits and cash generation.
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Cash-Flow-Statement-Based Accruals Ratio
Deckers Outdoor Corp., cash flow statement computation of aggregate accruals
US$ in thousands
| Mar 31, 2023 | Mar 31, 2022 | Mar 31, 2021 | Mar 31, 2020 | Mar 31, 2019 | Mar 31, 2018 | ||
|---|---|---|---|---|---|---|---|
| Net income | 516,822) | 451,949) | 382,575) | 276,142) | 264,308) | 114,394) | |
| Less: Net cash provided by operating activities | 537,422) | 172,353) | 596,217) | 286,334) | 359,505) | 327,351) | |
| Less: Net cash used in investing activities | (81,013) | (51,009) | (32,169) | (31,964) | (29,018) | (34,697) | |
| Cash-flow-statement-based aggregate accruals | 60,413) | 330,605) | (181,473) | 21,772) | (66,179) | (178,260) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 8.17% | 62.96% | -41.41% | 4.32% | -12.85% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| lululemon athletica inc. | 26.38% | 0.98% | — | — | — | — | |
| Nike Inc. | -11.14% | 23.34% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Consumer Durables & Apparel | -6.39% | 20.57% | 66.28% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 4.25% | 1.57% | 21.63% | — | — | — | |
Based on: 10-K (reporting date: 2023-03-31), 10-K (reporting date: 2022-03-31), 10-K (reporting date: 2021-03-31), 10-K (reporting date: 2020-03-31), 10-K (reporting date: 2019-03-31), 10-K (reporting date: 2018-03-31).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 60,413 ÷ [(783,938 + 695,298) ÷ 2] = 8.17%
2 Click competitor name to see calculations.
The financial data indicates significant volatility in the relationship between accounting earnings and cash flows over the five-year period ending March 31, 2023. This volatility is most evident in the fluctuations of the cash-flow-statement-based accruals ratio, which suggests periodic shifts in the quality of reported earnings.
- Net Operating Assets Trend
- Net operating assets exhibited a non-linear growth trajectory. After a moderate increase between 2019 and 2020, a notable contraction occurred in 2021, where assets decreased to 354,864 thousand US dollars. This was followed by a rapid expansion in 2022 and 2023, with assets peaking at 783,938 thousand US dollars by the end of the period, indicating a substantial increase in the company's operating resource base.
- Cash-Flow-Statement-Based Aggregate Accruals
- Aggregate accruals showed extreme variance, alternating between negative and positive values. The figures reached a nadir in 2021 at -181,473 thousand US dollars, followed by a sharp reversal to a peak of 330,605 thousand US dollars in 2022. By 2023, the aggregate accruals moderated to 60,413 thousand US dollars, suggesting a stabilization of the gap between accrual-based reporting and actual cash movements.
- Accruals Ratio Interpretation
- The accruals ratio experienced severe oscillations, reflecting inconsistent earnings quality during the period. A significant negative ratio of -41.41% in 2021 indicates that cash flows from operations substantially exceeded accrual-based earnings. Conversely, the surge to 62.96% in 2022 suggests a period where earnings were heavily driven by non-cash accruals, which typically signals a potential decrease in the immediate quality of earnings. The reduction to 8.17% in 2023 denotes a return toward a more neutral position, where accruals represent a smaller fraction of the net operating assets.
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