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
Estée Lauder Cos. Inc., balance sheet computation of aggregate accruals
US$ in millions
| Jun 30, 2023 | Jun 30, 2022 | Jun 30, 2021 | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2018 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 23,415) | 20,910) | 21,971) | 17,781) | 13,156) | 12,567) | |
| Less: Cash and cash equivalents | 4,029) | 3,957) | 4,958) | 5,022) | 2,987) | 2,181) | |
| Less: Short-term investments | —) | —) | —) | —) | —) | 534) | |
| Operating assets | 19,386) | 16,953) | 17,013) | 12,759) | 10,169) | 9,852) | |
| Operating Liabilities | |||||||
| Total liabilities | 16,998) | 14,478) | 15,023) | 13,819) | 8,745) | 7,857) | |
| Less: Current debt | 997) | 268) | 32) | 1,222) | 516) | 183) | |
| Less: Long-term debt, excluding current maturities | 7,117) | 5,144) | 5,537) | 4,914) | 2,896) | 3,361) | |
| Operating liabilities | 8,884) | 9,066) | 9,454) | 7,683) | 5,333) | 4,313) | |
| Net operating assets1 | 10,502) | 7,887) | 7,559) | 5,076) | 4,836) | 5,539) | |
| Balance-sheet-based aggregate accruals2 | 2,615) | 328) | 2,483) | 240) | (703) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 28.44% | 4.25% | 39.30% | 4.84% | -13.55% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Procter & Gamble Co. | 3.17% | 3.98% | — | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Consumer Staples | 2.58% | 7.61% | 200.00% | — | — | — | |
Based on: 10-K (reporting date: 2023-06-30), 10-K (reporting date: 2022-06-30), 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30), 10-K (reporting date: 2019-06-30), 10-K (reporting date: 2018-06-30).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 19,386 – 8,884 = 10,502
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 10,502 – 7,887 = 2,615
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,615 ÷ [(10,502 + 7,887) ÷ 2] = 28.44%
4 Click competitor name to see calculations.
The financial profile over the five-year period ending June 30, 2023, is characterized by a steady expansion of the operational asset base alongside significant volatility in the balance-sheet-based accruals ratio.
- Net Operating Assets Trend
- A consistent upward trajectory is observed in net operating assets, which increased from US$ 4,836 million in 2019 to US$ 10,502 million in 2023. This represents a substantial growth in the company's operational investments and working capital requirements over the analyzed period.
- Aggregate Accruals Fluctuations
- Balance-sheet-based aggregate accruals exhibit a non-linear and volatile pattern. After starting at a negative US$ 703 million in 2019, accruals rose sharply to US$ 2,483 million in 2021. A significant correction occurred in 2022, with accruals falling to US$ 328 million, before surging again to US$ 2,615 million by June 30, 2023.
- Accruals Ratio and Reporting Quality
- The accruals ratio mirrors the volatility of aggregate accruals, shifting from -13.55% in 2019 to a peak of 39.30% in 2021, dropping to 4.25% in 2022, and ending at 28.44% in 2023. The negative ratio in 2019 suggests a period where cash flows exceeded accrual-based earnings. However, the elevated ratios in 2021 and 2023 indicate a significant divergence where reported earnings were substantially higher than cash flows, a pattern that typically warrants closer scrutiny regarding the quality and sustainability of financial reporting.
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Cash-Flow-Statement-Based Accruals Ratio
Estée Lauder Cos. Inc., cash flow statement computation of aggregate accruals
US$ in millions
| Jun 30, 2023 | Jun 30, 2022 | Jun 30, 2021 | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2018 | ||
|---|---|---|---|---|---|---|---|
| Net earnings attributable to The Estée Lauder Companies Inc. | 1,006) | 2,390) | 2,870) | 684) | 1,785) | 1,108) | |
| Less: Net cash flows provided by operating activities | 1,731) | 3,040) | 3,631) | 2,280) | 2,517) | 2,573) | |
| Less: Net cash flows (used for) provided by investing activities | (3,217) | (945) | (1,864) | (1,698) | 473) | (369) | |
| Cash-flow-statement-based aggregate accruals | 2,492) | 295) | 1,103) | 102) | (1,205) | (1,096) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 27.10% | 3.82% | 17.46% | 2.06% | -23.23% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Procter & Gamble Co. | 1.81% | 3.50% | — | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Consumer Staples | 2.27% | 4.81% | -9.79% | — | — | — | |
Based on: 10-K (reporting date: 2023-06-30), 10-K (reporting date: 2022-06-30), 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30), 10-K (reporting date: 2019-06-30), 10-K (reporting date: 2018-06-30).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 2,492 ÷ [(10,502 + 7,887) ÷ 2] = 27.10%
2 Click competitor name to see calculations.
The financial trajectory from June 30, 2019, to June 30, 2023, is characterized by a consistent expansion of net operating assets and significant volatility in aggregate accruals. The widening gap between accrual-based earnings and cash flow suggests a shift in the quality of financial reporting over the analyzed period.
- Net Operating Assets Trend
- A steady and substantial increase in net operating assets is observed, rising from 4,836 million US dollars in 2019 to 10,502 million US dollars in 2023. This represents a growth of approximately 117% over the five-year period, with the most pronounced acceleration occurring between 2020 and 2021, and again between 2022 and 2023.
- Aggregate Accruals Volatility
- Cash-flow-statement-based aggregate accruals exhibit high variance. The figures transitioned from a significant negative position of -1,205 million US dollars in 2019 to a peak of 2,492 million US dollars by 2023. Notable fluctuations occurred in 2021, where accruals rose to 1,103 million US dollars, followed by a sharp decline to 295 million US dollars in 2022, before reaching the period high in 2023.
- Accruals Ratio Analysis
- The accruals ratio mirrors the volatility of the aggregate accruals, moving from -23.23% in 2019 to 27.10% in 2023. The shift from a negative ratio to a high positive ratio indicates that a larger portion of reported earnings is derived from non-cash accruals rather than cash flows. The peak ratio in 2023 suggests a heightened divergence between accounting profits and actual cash generation relative to the size of the operating asset base.
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