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
e.l.f. Beauty, Inc., balance sheet computation of aggregate accruals
US$ in thousands
| Mar 31, 2024 | Mar 31, 2023 | Mar 31, 2022 | Mar 31, 2021 | Mar 31, 2020 | ||
|---|---|---|---|---|---|---|
| Operating Assets | ||||||
| Total assets | 1,129,247) | 595,601) | 494,632) | 487,393) | 453,104) | |
| Less: Cash and cash equivalents | 108,183) | 120,778) | 43,353) | 57,768) | 46,167) | |
| Operating assets | 1,021,064) | 474,823) | 451,279) | 429,625) | 406,937) | |
| Operating Liabilities | ||||||
| Total liabilities | 486,675) | 184,584) | 182,203) | 217,747) | 210,933) | |
| Less: Current portion of long-term debt and finance lease obligations | 100,307) | 5,575) | 5,786) | 16,281) | 12,568) | |
| Less: Long-term debt and finance lease obligations | 161,819) | 60,881) | 91,080) | 110,255) | 126,088) | |
| Operating liabilities | 224,549) | 118,128) | 85,337) | 91,211) | 72,277) | |
| Net operating assets1 | 796,515) | 356,695) | 365,942) | 338,414) | 334,660) | |
| Balance-sheet-based aggregate accruals2 | 439,820) | (9,247) | 27,528) | 3,754) | —) | |
| Financial Ratio | ||||||
| Balance-sheet-based accruals ratio3 | 76.28% | -2.56% | 7.82% | 1.12% | — | |
| Benchmarks | ||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | ||||||
| Procter & Gamble Co. | 0.15% | 3.17% | 3.98% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | 1.15% | 2.58% | 7.61% | 200.00% | — | |
Based on: 10-K (reporting date: 2024-03-31), 10-K (reporting date: 2023-03-31), 10-K (reporting date: 2022-03-31), 10-K (reporting date: 2021-03-31), 10-K (reporting date: 2020-03-31).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 1,021,064 – 224,549 = 796,515
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 796,515 – 356,695 = 439,820
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 439,820 ÷ [(796,515 + 356,695) ÷ 2] = 76.28%
4 Click competitor name to see calculations.
The financial data exhibits a period of relative stability followed by a significant escalation in both net operating assets and accruals during the fiscal year ending March 31, 2024. The balance-sheet-based accruals ratio, which serves as a proxy for earnings quality, demonstrates extreme volatility, culminating in a substantial increase in the final year of the period analyzed.
- Net Operating Assets Trend
- Net operating assets remained relatively consistent between 2021 and 2023, fluctuating within a narrow range from 338.4 million to 356.7 million. However, a sharp increase occurred by March 31, 2024, where net operating assets rose to 796.5 million, representing a growth of approximately 123% over the prior year.
- Aggregate Accruals Dynamics
- Aggregate accruals showed inconsistent movement over the four-year period. Following a modest increase in 2022, accruals turned negative in 2023, reaching -9.2 million, which typically indicates that cash flows from operations exceeded reported earnings. This trend reversed abruptly in 2024, with aggregate accruals surging to 439.8 million.
- Analysis of the Accruals Ratio
- The accruals ratio remained low and stable from 2021 through 2023, moving from 1.12% to -2.56%, suggesting that reported earnings were closely aligned with cash flow generation during this timeframe. The ratio shifted dramatically to 76.28% in 2024. Such a significant increase indicates a substantial divergence between accrual-based earnings and actual cash flows relative to the company's asset base, which may signal a decrease in the immediate quality of financial reporting or a significant change in the timing of revenue and expense recognition.
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Cash-Flow-Statement-Based Accruals Ratio
e.l.f. Beauty, Inc., cash flow statement computation of aggregate accruals
US$ in thousands
| Mar 31, 2024 | Mar 31, 2023 | Mar 31, 2022 | Mar 31, 2021 | Mar 31, 2020 | ||
|---|---|---|---|---|---|---|
| Net income | 127,663) | 61,530) | 21,770) | 6,232) | 17,884) | |
| Less: Net cash provided by operating activities | 71,154) | 101,883) | 19,513) | 29,475) | 44,313) | |
| Less: Net cash used in investing activities | (284,660) | (1,723) | (4,818) | (6,474) | (35,345) | |
| Cash-flow-statement-based aggregate accruals | 341,169) | (38,630) | 7,075) | (16,769) | 8,916) | |
| Financial Ratio | ||||||
| Cash-flow-statement-based accruals ratio1 | 59.17% | -10.69% | 2.01% | -4.98% | — | |
| Benchmarks | ||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | ||||||
| Procter & Gamble Co. | -1.99% | 1.81% | 3.50% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | -0.17% | 2.27% | 4.81% | -9.79% | — | |
Based on: 10-K (reporting date: 2024-03-31), 10-K (reporting date: 2023-03-31), 10-K (reporting date: 2022-03-31), 10-K (reporting date: 2021-03-31), 10-K (reporting date: 2020-03-31).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 341,169 ÷ [(796,515 + 356,695) ÷ 2] = 59.17%
2 Click competitor name to see calculations.
An analysis of the financial reporting quality between March 31, 2021, and March 31, 2024, reveals a period of relative stability followed by a sharp increase in accruals. For the first three fiscal years, the relationship between reported earnings and cash flows remained consistent, with the accruals ratio fluctuating within a narrow range. However, the fiscal year ending March 31, 2024, marks a significant divergence in the growth of net operating assets and the accumulation of non-cash earnings.
- Net Operating Assets Trend
- Net operating assets showed minimal variance from 2021 to 2023, moving from 338.4 million US dollars to 356.7 million US dollars. A substantial expansion occurred in the final year of the period, with assets increasing to 796.5 million US dollars, reflecting a growth of approximately 123.6% over the previous year.
- Aggregate Accruals Movement
- Cash-flow-statement-based aggregate accruals exhibited alternating signs and moderate values from 2021 through 2023, ranging from -38.6 million to 7.1 million US dollars. In the period ending March 31, 2024, these accruals surged to 341.2 million US dollars, indicating a significant increase in the gap between accrual-based accounting income and actual cash flow from operations.
- Accruals Ratio Analysis
- The accruals ratio remained low and volatile between 2021 and 2023, recording values of -4.98%, 2.01%, and -10.69%, respectively. A dramatic spike to 59.17% is observed for the period ending March 31, 2024. This sharp increase suggests that a considerable portion of the reported earnings is not supported by cash flows relative to the company's net operating assets, which typically indicates a decline in the quality of earnings or a period of aggressive balance sheet expansion.
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