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% | 4.39% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | 1.15% | 2.58% | 7.61% | -0.13% | — | |
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.
- Net Operating Assets
- The net operating assets demonstrate a generally increasing trend over the four-year period. Starting at approximately 338 million in 2021, the value increased modestly to around 366 million in 2022 and slightly decreased to about 357 million in 2023. However, there is a significant surge in 2024, where the figure more than doubles to approximately 797 million. This sharp increase in the most recent year indicates a substantial expansion in operational asset holdings.
- Balance-Sheet-Based Aggregate Accruals
- The aggregate accruals exhibit considerable volatility throughout the period. In 2021, the value was relatively low at approximately 3.8 million, increasing markedly to around 27.5 million in 2022. A notable reversal occurs in 2023, with a negative accrual figure near -9.2 million, suggesting possible adjustments or reductions in accruals. The year 2024 reveals a dramatic jump to approximately 440 million in accruals, aligning with the significant rise seen in net operating assets during the same period.
- Balance-Sheet-Based Accruals Ratio
- This ratio reflects the proportion of accruals relative to net operating assets, expressed as a percentage. The ratio starts at a low level of 1.12% in 2021, increasing substantially to 7.82% in 2022. It then drops into negative territory at -2.56% in 2023, consistent with the negative aggregate accruals observed that year. The ratio spikes sharply to 76.28% in 2024, indicating that accruals constitute a much higher fraction of net operating assets compared to previous years. This elevated level may warrant further investigation into the quality and sustainability of earnings.
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% | -1.84% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | ||||||
| Consumer Staples | -0.17% | 2.27% | 4.81% | -4.89% | — | |
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.
- Net Operating Assets
- The net operating assets exhibited a generally increasing trend from the fiscal year ending March 31, 2021, through March 31, 2024. Beginning at approximately US$338 million in 2021, the amount rose moderately to about US$366 million in 2022, then slightly declined to around US$357 million in 2023. A significant increase was noted in 2024, with the figure more than doubling to approximately US$797 million, indicating a substantial growth in operating asset base during the latest reported period.
- Cash-Flow-Statement-Based Aggregate Accruals
- The aggregate accruals fluctuated considerably over the four-year span. In 2021, the accruals were negative, approximately -US$17 million, suggesting a cash inflow exceeding income in that period. In 2022, the figure reversed to a positive US$7 million, indicating increased accruals. The subsequent year, 2023, again saw a negative value of -US$38.6 million, reflecting another shift. The most notable change occurred in 2024, with a sharp escalation to a positive US$341 million, an extraordinary increase compared to prior years, implying significant accrual adjustments affecting cash flow.
- Cash-Flow-Statement-Based Accruals Ratio (%)
- The accruals ratio mirrored the volatility observed in aggregate accruals, displaying a highly variable pattern. Beginning with a negative ratio of -4.98% in 2021, it transitioned to a modest positive 2.01% in 2022. The ratio declined again to -10.69% in 2023, consistent with the aggregate accruals' negative sign. In 2024, the ratio surged dramatically to 59.17%, reflecting a substantial relative impact of accruals on cash flow in that year. This large increase may indicate significant changes in working capital components or accounting estimates influencing reported cash flows.