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% | — | — | — | — | |
| 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.
The financial data reveals a consistent expansion of the balance sheet alongside significant volatility in aggregate accruals between February 2019 and January 2023.
- Net Operating Assets
- A steady upward trajectory is observed in net operating assets, which grew from 902,518 thousand US dollars in 2019 to 2,436,218 thousand US dollars in 2023. This represents a sustained increase in the company's operational investment over the five-year period.
- Balance-sheet-based Aggregate Accruals
- Aggregate accruals exhibit substantial volatility. A sharp increase occurred in 2020, reaching 395,885 thousand US dollars, followed by a significant decline to 152,454 thousand US dollars in 2021. A subsequent two-year period of growth followed, culminating in a peak of 623,360 thousand US dollars in 2023.
- Balance-sheet-based Accruals Ratio
- The accruals ratio reflects the volatility observed in the aggregate accruals. Starting at 6.12% in 2019, the ratio spiked to 35.97% in 2020 before correcting to 11.09% in 2021. In the final two years of the period, the ratio rose steadily to 22.18% and 29.34%, respectively. These fluctuations indicate periods of divergence between reported accrual-based earnings and cash flow, with the most recent trend showing an increasing gap that may impact the assessment of earnings 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% | — | — | — | — | |
| 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.
The financial data indicates a significant shift in the relationship between net operating assets and cash-flow-based accruals over the five-year period ending January 28, 2023. While net operating assets exhibited consistent growth, the aggregate accruals transitioned from a period of relative stability and negative values to a period of substantial positive growth, resulting in a sharp increase in the accruals ratio.
- Net Operating Assets Expansion
- A continuous upward trajectory in net operating assets is observed, increasing from 902,518 thousand US dollars in February 2019 to 2,436,218 thousand US dollars by January 2023. This represents an approximate 170% increase over the analyzed period, reflecting a significant expansion of the asset base used in operations.
- Aggregate Accruals Volatility and Shift
- Cash-flow-statement-based aggregate accruals remained relatively low and fluctuated between negative and slightly positive values from 2019 to 2021, reaching a low of -31,355 thousand US dollars in January 2021. However, a stark reversal occurred in January 2022, with accruals jumping to 220,785 thousand US dollars, and continuing to rise to 296,023 thousand US dollars by January 2023.
- Accruals Ratio Interpretation
- The accruals ratio remained negligible or negative between 2019 and 2021, with values ranging from -2.28% to 0.34%, suggesting that earnings were closely aligned with, or exceeded, cash flow from operations. Starting in January 2022, the ratio experienced a sharp increase to 13.53%, maintaining a similar level of 13.93% in January 2023. This substantial increase indicates a growing divergence between reported accounting earnings and actual cash flow, as a larger portion of the company's earnings is now comprised of non-cash accruals relative to its net operating assets.
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