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
Williams-Sonoma Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Jan 28, 2024 | Jan 29, 2023 | Jan 30, 2022 | Jan 31, 2021 | Feb 2, 2020 | Feb 3, 2019 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 5,273,548) | 4,663,016) | 4,625,620) | 4,661,424) | 4,054,042) | 2,812,844) | |
| Less: Cash and cash equivalents | 1,262,007) | 367,344) | 850,338) | 1,200,337) | 432,162) | 338,954) | |
| Operating assets | 4,011,541) | 4,295,672) | 3,775,282) | 3,461,087) | 3,621,880) | 2,473,890) | |
| Operating Liabilities | |||||||
| Total liabilities | 3,145,687) | 2,961,965) | 2,961,413) | 3,010,239) | 2,818,182) | 1,657,130) | |
| Less: Current debt | —) | —) | —) | 299,350) | 299,818) | —) | |
| Less: Long-term debt | —) | —) | —) | —) | —) | 299,620) | |
| Operating liabilities | 3,145,687) | 2,961,965) | 2,961,413) | 2,710,889) | 2,518,364) | 1,357,510) | |
| Net operating assets1 | 865,854) | 1,333,707) | 813,869) | 750,198) | 1,103,516) | 1,116,380) | |
| Balance-sheet-based aggregate accruals2 | (467,853) | 519,838) | 63,671) | (353,318) | (12,864) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | -42.54% | 48.41% | 8.14% | -38.12% | -1.16% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Amazon.com Inc. | 26.40% | 18.01% | 32.91% | — | — | — | |
| Home Depot Inc. | -1.45% | 15.25% | 9.91% | — | — | — | |
| Lowe’s Cos. Inc. | 8.87% | -2.92% | 2.66% | — | — | — | |
| TJX Cos. Inc. | 7.22% | 30.23% | 73.65% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Consumer Discretionary Distribution & Retail | 20.94% | 16.15% | 26.47% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 12.07% | 12.01% | 13.04% | 200.00% | — | — | |
Based on: 10-K (reporting date: 2024-01-28), 10-K (reporting date: 2023-01-29), 10-K (reporting date: 2022-01-30), 10-K (reporting date: 2021-01-31), 10-K (reporting date: 2020-02-02), 10-K (reporting date: 2019-02-03).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 4,011,541 – 3,145,687 = 865,854
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 865,854 – 1,333,707 = -467,853
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × -467,853 ÷ [(865,854 + 1,333,707) ÷ 2] = -42.54%
4 Click competitor name to see calculations.
The analysis of the balance-sheet-based accruals ratio reveals a period of significant volatility between February 2020 and January 2024. The metrics indicate a recurring cycle of divergence between reported accounting earnings and actual cash flows, characterized by sharp reversals in both the absolute value and the direction of aggregate accruals.
- Net Operating Assets Dynamics
- Net operating assets experienced a non-linear trajectory, decreasing from 1.10 billion in February 2020 to 750.20 million in January 2021. A substantial expansion followed, peaking at 1.33 billion in January 2023, before contracting sharply to 865.85 million by January 2024.
- Aggregate Accruals Fluctuations
- Balance-sheet-based aggregate accruals shifted from a modest negative position of -12.86 million in 2020 to a deep negative of -353.32 million in 2021. This trend reversed into positive territory through 2022 and 2023, reaching a peak of 519.84 million, before swinging back to a negative 467.85 million in January 2024.
- Accruals Ratio Trends and Earnings Quality
- The accruals ratio reflects high instability, moving from -1.16% in 2020 to -38.12% in 2021. A transition to positive territory occurred in 2022 (8.14%), culminating in a peak of 48.41% in 2023. This high positive ratio suggests that a significant portion of the earnings reported in 2023 was derived from non-cash accruals rather than cash flow. The subsequent collapse to -42.54% in 2024 indicates a substantial reversal of these accruals or a pivot toward cash-driven earnings relative to the net operating asset base.
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Cash-Flow-Statement-Based Accruals Ratio
Williams-Sonoma Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Jan 28, 2024 | Jan 29, 2023 | Jan 30, 2022 | Jan 31, 2021 | Feb 2, 2020 | Feb 3, 2019 | ||
|---|---|---|---|---|---|---|---|
| Net earnings | 949,762) | 1,127,904) | 1,126,337) | 680,714) | 356,062) | 333,684) | |
| Less: Net cash provided by operating activities | 1,680,273) | 1,052,822) | 1,371,147) | 1,274,848) | 607,294) | 585,986) | |
| Less: Net cash used in investing activities | (188,257) | (353,955) | (226,247) | (168,884) | (185,548) | (187,899) | |
| Cash-flow-statement-based aggregate accruals | (542,254) | 429,037) | (18,563) | (425,250) | (65,684) | (64,403) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | -49.31% | 39.96% | -2.37% | -45.88% | -5.92% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Amazon.com Inc. | 16.87% | -2.63% | -8.54% | — | — | — | |
| Home Depot Inc. | -3.12% | 14.43% | 8.24% | — | — | — | |
| Lowe’s Cos. Inc. | 7.91% | -4.62% | -0.14% | — | — | — | |
| TJX Cos. Inc. | 3.04% | 23.97% | 55.57% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Consumer Discretionary Distribution & Retail | 13.19% | 0.41% | -4.02% | 50.12% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 9.43% | 4.25% | 1.57% | 21.63% | — | — | |
Based on: 10-K (reporting date: 2024-01-28), 10-K (reporting date: 2023-01-29), 10-K (reporting date: 2022-01-30), 10-K (reporting date: 2021-01-31), 10-K (reporting date: 2020-02-02), 10-K (reporting date: 2019-02-03).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × -542,254 ÷ [(865,854 + 1,333,707) ÷ 2] = -49.31%
2 Click competitor name to see calculations.
The financial reporting quality, as measured by the cash-flow-statement-based accruals ratio, exhibits significant volatility over the five-year period ending January 28, 2024. The metrics demonstrate frequent and substantial swings between negative and positive values, indicating fluctuating alignment between accrual-based earnings and cash flow generation.
- Net Operating Assets Trends
- Net operating assets showed a non-linear trajectory, beginning at $1,103.5 million in 2020 and decreasing to $750.2 million in 2021. A gradual increase followed, culminating in a peak of $1,333.7 million in 2023, before retreating to $865.9 million in 2024.
- Aggregate Accruals Performance
- Cash-flow-statement-based aggregate accruals remained negative for most of the period, with a notable deepening to -$425.3 million in 2021. A significant reversal occurred in 2023, where accruals shifted to a positive $429.0 million. This was immediately followed by a sharp decline to -$542.3 million in 2024, representing the most extreme negative value in the series.
- Accruals Ratio Analysis
- The accruals ratio fluctuated from -5.92% in 2020 to a low of -45.88% in 2021. While the ratio normalized to -2.37% in 2022, it surged to a positive 39.96% in 2023, coinciding with the peak in net operating assets. The period concluded with a sharp reversal to -49.31% in 2024. These fluctuations suggest that for the majority of the period, cash flows exceeded accrual-based earnings, with 2023 serving as a distinct outlier where earnings exceeded cash flows.
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