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.
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Estée Lauder Cos. Inc. pages available for free this week:
- Balance Sheet: Assets
- Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Profitability Ratios
- Analysis of Liquidity Ratios
- Common Stock Valuation Ratios
- Enterprise Value to EBITDA (EV/EBITDA)
- Capital Asset Pricing Model (CAPM)
- Present Value of Free Cash Flow to Equity (FCFE)
- Return on Assets (ROA) since 2005
- Price to Earnings (P/E) since 2005
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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 | |||||||
| Less: Cash and cash equivalents | |||||||
| Less: Short-term investments | |||||||
| Operating assets | |||||||
| Operating Liabilities | |||||||
| Total liabilities | |||||||
| Less: Current debt | |||||||
| Less: Long-term debt, excluding current maturities | |||||||
| Operating liabilities | |||||||
| Net operating assets1 | |||||||
| Balance-sheet-based aggregate accruals2 | |||||||
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | |||||||
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Procter & Gamble Co. | |||||||
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Consumer Staples | |||||||
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
= – =
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= – =
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × ÷ [( + ) ÷ 2] =
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets demonstrated an overall increasing trend across the reported periods. Starting from 4,836 million USD in mid-2019, the figure rose moderately to 5,076 million USD in 2020. A notable increase occurred in 2021, reaching 7,559 million USD, followed by a slight rise to 7,887 million USD the following year. The most substantial growth was observed by mid-2023, with net operating assets peaking at 10,502 million USD. This consistent upward movement indicates expansion in operational asset investment over the five-year period.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals exhibited significant volatility over the periods. Initially, the accruals were negative at -703 million USD in 2019, shifting to a positive 240 million USD in 2020. A substantial spike was recorded in 2021 at 2,483 million USD, indicating increased accrual activity. However, in 2022, accruals sharply decreased to 328 million USD, before rising again considerably to 2,615 million USD in 2023. These fluctuations suggest varying levels of earnings management or timing differences in income and expenses recognition.
- Balance-sheet-based Accruals Ratio
- The accruals ratio mirrored the behavior of aggregate accruals but expressed as a percentage of net operating assets. It started at a negative 13.55% in 2019, turning positive at 4.84% in 2020, then surged dramatically to 39.3% in 2021. A pronounced decline followed in 2022, dropping to 4.25%, before escalating again to 28.44% by mid-2023. The wide fluctuations in this ratio emphasize substantial variability in accrual levels relative to the size of net operating assets, pointing towards irregularities in accrual-based earnings components during this timeframe.
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. | |||||||
| Less: Net cash flows provided by operating activities | |||||||
| Less: Net cash flows (used for) provided by investing activities | |||||||
| Cash-flow-statement-based aggregate accruals | |||||||
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | |||||||
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Procter & Gamble Co. | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Consumer Staples | |||||||
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] =
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets show a general upward trend over the five-year period. Starting at 4,836 million US dollars in mid-2019, the figure increases gradually to 5,076 million in 2020, followed by a more pronounced rise to 7,559 million in 2021. The growth continues modestly in 2022, reaching 7,887 million, and then accelerates markedly to 10,502 million in 2023. This indicates expanding asset base employed in operations over the period analyzed.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals fluctuate significantly during the period. In June 2019, there is a negative value of -1,205 million US dollars, indicating a possible reduction in accruals or an outflow in working capital adjustments. This shifts to a small positive value of 102 million in 2020, then jumps substantially to 1,103 million in 2021. Following a decline to 295 million in 2022, the value increases sharply again to 2,492 million in 2023. The variability signals changing accrual management or timing differences in operational cash flows across the years.
- Cash-Flow-Statement-Based Accruals Ratio (%)
- The accruals ratio presents considerable volatility, moving from a negative figure of -23.23% in 2019 to positive territory of 2.06% in 2020. It rises sharply to 17.46% in 2021, drops to 3.82% in 2022, before surging again to the highest level of 27.1% in 2023. Such fluctuations in the ratio suggest inconsistent accrual quality relative to cash flows, with potential increases in accrual-based earnings components, particularly pronounced in the most recent year.