Home Depot Inc. (HD)

Financial Reporting Quality: Aggregate Accruals

Difficulty: Advanced

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
Cash-Flow-Statement-Based Accruals Ratio

Balance-Sheet-Based Accruals Ratio

Home Depot Inc., balance sheet computation of aggregate accruals

USD $ in millions

		Feb 3, 2019	Jan 28, 2018	Jan 29, 2017	Jan 31, 2016	Feb 1, 2015	Feb 2, 2014
	Operating Assets
	Total assets
	Less: Cash and cash equivalents
	Operating assets
	Operating Liabilities
	Total liabilities
	Less: Short-term debt
	Less: Current installments of long-term debt
	Less: Long-term debt, excluding current installments
	Operating liabilities

	Net operating assets¹
	Balance-sheet-based aggregate accruals²
	Ratio
	Balance-sheet-based accruals ratio³
	Benchmarks
	Balance-Sheet-Based Accruals Ratio, Competitors
	Amazon.com Inc.
	Costco Wholesale Corp.
	eBay Inc.
	Lowe’s Cos. Inc.
	Netflix Inc.
	Target Corp.
	TJX Cos. Inc.
	Walmart Inc.
	Balance-Sheet-Based Accruals Ratio, Sector
	General Retailers
	Balance-Sheet-Based Accruals Ratio, Industry
	Consumer Services

Based on: 10-K (filing date: 2019-03-28), 10-K (filing date: 2018-03-22), 10-K (filing date: 2017-03-23), 10-K (filing date: 2016-03-24), 10-K (filing date: 2015-03-26), 10-K (filing date: 2014-03-27).

2019 Calculations

¹ Net operating assets = Operating assets – Operating liabilities
= hidden – hidden = hidden

² Balance-sheet-based aggregate accruals = Net operating assets ₂₀₁₉ – Net operating assets ₂₀₁₈
= hidden – hidden = hidden

³ Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × hidden ÷ [( hidden + hidden ) ÷ 2] = hidden

Ratio	Description	The company
Balance-sheet-based accruals ratio	Ratio is found by dividing balance-sheet-based aggregate accruals by average net operating assets.	Using the balance-sheet-based accruals ratio, Home Depot Inc. deteriorated earnings quality from 2018 to 2019.

Cash-Flow-Statement-Based Accruals Ratio

Home Depot Inc., cash flow statement computation of aggregate accruals

USD $ in millions

		Feb 3, 2019	Jan 28, 2018	Jan 29, 2017	Jan 31, 2016	Feb 1, 2015	Feb 2, 2014
	Net earnings
	Less: Net cash provided by operating activities
	Less: Net cash used in investing activities
	Cash-flow-statement-based aggregate accruals
	Ratio
	Cash-flow-statement-based accruals ratio¹
	Benchmarks
	Cash-Flow-Statement-Based Accruals Ratio, Competitors
	Amazon.com Inc.
	Costco Wholesale Corp.
	eBay Inc.
	Lowe’s Cos. Inc.
	Netflix Inc.
	Target Corp.
	TJX Cos. Inc.
	Walmart Inc.
	Cash-Flow-Statement-Based Accruals Ratio, Sector
	General Retailers
	Cash-Flow-Statement-Based Accruals Ratio, Industry
	Consumer Services

2019 Calculations

¹ Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × hidden ÷ [( hidden + hidden ) ÷ 2] = hidden

Ratio	Description	The company
Cash-flow-statement-based accruals ratio	Ratio is found by dividing cash-flow-statement-based aggregate accruals by average net operating assets.	Using the cash-flow-statement-based accruals ratio, Home Depot Inc. improved earnings quality from 2018 to 2019.

	Home Depot Inc.	Other companies (not purchased previously)
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Relative Valuation
Discounted Cash Flow (DCF) Valuation
Economic Value Added (EVA)
Long-term Trends
Analysis
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Financial Statements
Common-Size Financial Statements
Ratios
Relative Valuation
Discounted Cash Flow (DCF) Valuation
Economic Value Added (EVA)
Long-term Trends
Analysis
Financial Reporting Quality