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
RH, balance sheet computation of aggregate accruals
US$ in thousands
| Jan 28, 2023 | Jan 29, 2022 | Jan 30, 2021 | Feb 1, 2020 | Feb 2, 2019 | Feb 3, 2018 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 5,309,289) | 5,540,470) | 2,898,313) | 2,445,694) | 1,806,034) | 1,732,866) | |
| Less: Cash and cash equivalents | 1,508,101) | 2,177,889) | 100,446) | 47,658) | 5,803) | 17,907) | |
| Less: Restricted cash | 3,662) | —) | —) | —) | —) | —) | |
| Operating assets | 3,797,526) | 3,362,581) | 2,797,867) | 2,398,036) | 1,800,231) | 1,714,959) | |
| Operating Liabilities | |||||||
| Total liabilities | 4,524,628) | 4,370,193) | 2,451,287) | 2,427,043) | 1,828,996) | 1,740,202) | |
| Less: Convertible senior notes due 2024, net | —) | 3,600) | —) | —) | —) | —) | |
| Less: Convertible senior notes due 2023, net | 1,696) | 9,389) | 2,354) | —) | —) | —) | |
| Less: Convertible senior notes due 2020, net | —) | —) | —) | 290,532) | —) | —) | |
| Less: Convertible senior notes due 2019, net | —) | —) | —) | —) | 343,789) | —) | |
| Less: Current portion of term loans | 25,000) | 20,000) | —) | —) | —) | —) | |
| Less: Current finance lease liabilities | 17,007) | 15,511) | 14,671) | 9,188) | 1,074) | 471) | |
| Less: Current portion of equipment promissory notes | 1,160) | 13,625) | 22,747) | 22,009) | 892) | 6,033) | |
| Less: Asset based credit facility | —) | —) | —) | —) | 57,500) | 199,970) | |
| Less: Term loan B, net | 1,936,529) | 1,953,203) | —) | —) | —) | —) | |
| Less: Term loan B-2, net | 469,245) | —) | —) | —) | —) | —) | |
| Less: Term loan, net | —) | —) | —) | —) | —) | 79,499) | |
| Less: Real estate loans | 17,909) | —) | —) | —) | —) | —) | |
| Less: Convertible senior notes due 2024, net | 41,724) | 184,461) | 281,454) | 264,982) | —) | —) | |
| Less: Convertible senior notes due 2023, net | —) | 59,002) | 282,956) | 266,658) | 249,151) | —) | |
| Less: Convertible senior notes due 2020, net | —) | —) | —) | —) | 271,157) | 252,994) | |
| Less: Convertible senior notes due 2019, net | —) | —) | —) | —) | —) | 327,731) | |
| Less: Non-current finance lease liabilities | 653,050) | 560,550) | 485,481) | 442,988) | 7,720) | 7,509) | |
| Less: Non-current portion of equipment promissory notes, net | —) | 1,129) | 14,614) | 31,053) | —) | —) | |
| Operating liabilities | 1,361,308) | 1,549,723) | 1,347,010) | 1,099,633) | 897,713) | 865,995) | |
| Net operating assets1 | 2,436,218) | 1,812,858) | 1,450,857) | 1,298,403) | 902,518) | 848,964) | |
| Balance-sheet-based aggregate accruals2 | 623,360) | 362,001) | 152,454) | 395,885) | 53,554) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 29.34% | 22.18% | 11.09% | 35.97% | 6.12% | — | |
| 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% | -109.84% | — | — | — | |
| 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: 2023-01-28), 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03).
1 2023 Calculation
Net operating assets = Operating assets – Operating liabilities
= 3,797,526 – 1,361,308 = 2,436,218
2 2023 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2023 – Net operating assets2022
= 2,436,218 – 1,812,858 = 623,360
3 2023 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 623,360 ÷ [(2,436,218 + 1,812,858) ÷ 2] = 29.34%
4 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets show a consistent increase over the observed periods. Starting at approximately 902 million US dollars in early 2019, the value rises steadily each year, reaching nearly 2.44 billion US dollars by early 2023. This represents substantial growth, indicating an expansion in the scale of operating assets over the five-year span.
- Balance-sheet-based Aggregate Accruals
- The balance-sheet-based aggregate accruals display a fluctuating but overall upward trend. Initially, the accruals were about 53.5 million US dollars in early 2019, then they sharply increased to nearly 396 million US dollars in early 2020. The amount considerably decreased to approximately 152 million US dollars in early 2021, before rising again to 362 million and eventually 623 million US dollars in the subsequent years. This volatility suggests variability in accrual accounting components impacting reported earnings.
- Balance-sheet-based Accruals Ratio
- The accruals ratio, expressed as a percentage, mirrors the fluctuations found in the aggregate accruals but with notable increases in certain years. Starting at 6.12% in early 2019, the ratio peaks at 35.97% in early 2020, then declines to 11.09% in early 2021. It again increases in the following years to 22.18% and 29.34% respectively. These variations indicate changes in the proportion of accruals relative to net operating assets, which may reflect shifts in earnings recognition policies or operational changes affecting the financial reporting quality.
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Cash-Flow-Statement-Based Accruals Ratio
RH, cash flow statement computation of aggregate accruals
US$ in thousands
| Jan 28, 2023 | Jan 29, 2022 | Jan 30, 2021 | Feb 1, 2020 | Feb 2, 2019 | Feb 3, 2018 | ||
|---|---|---|---|---|---|---|---|
| Net income | 528,642) | 688,546) | 271,815) | 220,375) | 150,639) | 2,180) | |
| Less: Net cash provided by operating activities | 403,687) | 662,114) | 500,770) | 339,188) | 300,556) | 555,102) | |
| Less: Net cash (used in) provided by investing activities | (171,068) | (194,353) | (197,600) | (122,545) | (136,736) | 64,043) | |
| Cash-flow-statement-based aggregate accruals | 296,023) | 220,785) | (31,355) | 3,732) | (13,181) | (616,965) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 13.93% | 13.53% | -2.28% | 0.34% | -1.51% | — | |
| 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% | -121.39% | — | — | — | |
| 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: 2023-01-28), 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03).
1 2023 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 296,023 ÷ [(2,436,218 + 1,812,858) ÷ 2] = 13.93%
2 Click competitor name to see calculations.
- Net Operating Assets
- The net operating assets exhibited a consistent upward trend throughout the analyzed periods, increasing from approximately 902.5 million US dollars in early 2019 to about 2.44 billion US dollars by early 2023. This steady growth suggests an expansion in the company's operational scale or investment in productive assets over the five-year span.
- Cash-flow-statement-based Aggregate Accruals
- The aggregate accruals demonstrated considerable volatility with a negative value of around -13.2 million US dollars in 2019, slightly positive at approximately 3.7 million in 2020, then declining sharply to -31.4 million in 2021. Subsequently, there was a significant positive increase to approximately 220.8 million in 2022, further rising to approximately 296.0 million in 2023. This pattern indicates fluctuations in the timing differences between earnings and cash flows, with substantial positive accruals in the most recent two years potentially signaling changes in revenue recognition, expense deferrals, or working capital adjustments.
- Cash-flow-statement-based Accruals Ratio
- The accruals ratio mirrored the fluctuations seen in aggregate accruals, starting slightly negative at -1.51% in 2019, minimal positive at 0.34% in 2020, and then decreasing to -2.28% in 2021. A marked increase occurred thereafter, reaching 13.53% in 2022 and slightly rising to 13.93% in 2023. The rise in this ratio in the latest two periods suggests an increasing proportion of accruals relative to net operating assets, which may indicate higher earnings manipulation risk or changes in accrual accounting policies.
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