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
Dollar General Corp., balance sheet computation of aggregate accruals
US$ in thousands
| Feb 2, 2024 | Feb 3, 2023 | Jan 28, 2022 | Jan 29, 2021 | Jan 31, 2020 | Feb 1, 2019 | ||
|---|---|---|---|---|---|---|---|
| Operating Assets | |||||||
| Total assets | 30,795,591) | 29,083,367) | 26,327,371) | 25,862,624) | 22,825,084) | 13,204,038) | |
| Less: Cash and cash equivalents | 537,283) | 381,576) | 344,829) | 1,376,577) | 240,320) | 235,487) | |
| Operating assets | 30,258,308) | 28,701,791) | 25,982,542) | 24,486,047) | 22,584,764) | 12,968,551) | |
| Operating Liabilities | |||||||
| Total liabilities | 24,046,472) | 23,541,595) | 20,065,385) | 19,201,386) | 16,122,584) | 6,786,645) | |
| Less: Current portion of long-term obligations | 768,645) | —) | —) | —) | 555) | 1,950) | |
| Less: Long-term obligations, excluding current portion | 6,231,539) | 7,009,399) | 4,172,068) | 4,130,975) | 2,911,438) | 2,862,740) | |
| Operating liabilities | 17,046,288) | 16,532,196) | 15,893,317) | 15,070,411) | 13,210,591) | 3,921,955) | |
| Net operating assets1 | 13,212,020) | 12,169,595) | 10,089,225) | 9,415,636) | 9,374,173) | 9,046,596) | |
| Balance-sheet-based aggregate accruals2 | 1,042,425) | 2,080,370) | 673,589) | 41,463) | 327,577) | —) | |
| Financial Ratio | |||||||
| Balance-sheet-based accruals ratio3 | 8.21% | 18.69% | 6.91% | 0.44% | 3.56% | — | |
| Benchmarks | |||||||
| Balance-Sheet-Based Accruals Ratio, Competitors4 | |||||||
| Costco Wholesale Corp. | 11.49% | -0.39% | 20.71% | 5.32% | — | — | |
| Target Corp. | 2.06% | 19.69% | 10.33% | — | — | — | |
| Walmart Inc. | 6.15% | 0.02% | 1.09% | — | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Consumer Staples Distribution & Retail | 6.12% | 2.78% | 4.30% | 200.00% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Consumer Staples | 1.15% | 2.58% | 7.61% | 200.00% | — | — | |
Based on: 10-K (reporting date: 2024-02-02), 10-K (reporting date: 2023-02-03), 10-K (reporting date: 2022-01-28), 10-K (reporting date: 2021-01-29), 10-K (reporting date: 2020-01-31), 10-K (reporting date: 2019-02-01).
1 2024 Calculation
Net operating assets = Operating assets – Operating liabilities
= 30,258,308 – 17,046,288 = 13,212,020
2 2024 Calculation
Balance-sheet-based aggregate accruals = Net operating assets2024 – Net operating assets2023
= 13,212,020 – 12,169,595 = 1,042,425
3 2024 Calculation
Balance-sheet-based accruals ratio = 100 × Balance-sheet-based aggregate accruals ÷ Avg. net operating assets
= 100 × 1,042,425 ÷ [(13,212,020 + 12,169,595) ÷ 2] = 8.21%
4 Click competitor name to see calculations.
An analysis of financial reporting quality reveals a period of significant volatility in aggregate accruals relative to the growth of net operating assets between fiscal year 2020 and 2024.
- Net Operating Assets Trend
- Net operating assets exhibited a consistent upward trajectory over the five-year period. From a baseline of US$ 9.37 billion in January 2020, assets grew to US$ 13.21 billion by February 2024. The most pronounced expansion occurred between January 2022 and February 2023, during which assets increased by approximately 20%.
- Aggregate Accruals Volatility
- Balance-sheet-based aggregate accruals showed substantial fluctuation. After a sharp decline to US$ 41.46 million in January 2021, accruals surged to a peak of US$ 2.08 billion in February 2023. This peak was followed by a significant reduction to US$ 1.04 billion in February 2024, representing a 50% decrease from the prior year's high.
- Accruals Ratio Interpretation
- The accruals ratio reflects varying levels of earnings quality across the observed period. The ratio remained relatively low in 2020 and 2021, reaching a minimum of 0.44%. A steep escalation occurred by February 2023, where the ratio peaked at 18.69%. This surge indicates a period where non-cash components of earnings were disproportionately high relative to the operating asset base. The subsequent decline to 8.21% in February 2024 suggests a partial normalization of accruals, although the ratio remains elevated compared to the 2020-2021 levels.
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Cash-Flow-Statement-Based Accruals Ratio
Dollar General Corp., cash flow statement computation of aggregate accruals
US$ in thousands
| Feb 2, 2024 | Feb 3, 2023 | Jan 28, 2022 | Jan 29, 2021 | Jan 31, 2020 | Feb 1, 2019 | ||
|---|---|---|---|---|---|---|---|
| Net income | 1,661,274) | 2,415,989) | 2,399,232) | 2,655,050) | 1,712,555) | 1,589,472) | |
| Less: Net cash provided by operating activities | 2,391,798) | 1,984,555) | 2,865,811) | 3,876,159) | 2,237,998) | 2,143,550) | |
| Less: Net cash used in investing activities | (1,694,023) | (1,555,346) | (1,065,557) | (1,024,910) | (782,485) | (731,603) | |
| Cash-flow-statement-based aggregate accruals | 963,499) | 1,986,780) | 598,978) | (196,199) | 257,042) | 177,525) | |
| Financial Ratio | |||||||
| Cash-flow-statement-based accruals ratio1 | 7.59% | 17.85% | 6.14% | -2.09% | 2.79% | — | |
| Benchmarks | |||||||
| Cash-Flow-Statement-Based Accruals Ratio, Competitors2 | |||||||
| Costco Wholesale Corp. | 2.33% | 1.10% | 14.69% | -2.96% | — | — | |
| Target Corp. | 1.09% | 18.64% | 7.52% | — | — | — | |
| Walmart Inc. | 0.87% | 0.47% | -3.77% | — | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Consumer Staples Distribution & Retail | 1.06% | 3.13% | -0.42% | -21.72% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Consumer Staples | -0.17% | 2.27% | 4.81% | -9.79% | — | — | |
Based on: 10-K (reporting date: 2024-02-02), 10-K (reporting date: 2023-02-03), 10-K (reporting date: 2022-01-28), 10-K (reporting date: 2021-01-29), 10-K (reporting date: 2020-01-31), 10-K (reporting date: 2019-02-01).
1 2024 Calculation
Cash-flow-statement-based accruals ratio = 100 × Cash-flow-statement-based aggregate accruals ÷ Avg. net operating assets
= 100 × 963,499 ÷ [(13,212,020 + 12,169,595) ÷ 2] = 7.59%
2 Click competitor name to see calculations.
The analysis of cash-flow-statement-based accruals reveals significant volatility in financial reporting quality between 2020 and 2024. While the asset base expanded consistently, the divergence between accounting earnings and cash flows exhibited substantial fluctuations, peaking in 2023.
- Net Operating Assets Growth
- A consistent upward trend is observed in net operating assets, which increased from $9.37 billion in 2020 to $13.21 billion in 2024. This growth accelerated notably after 2022, indicating a sustained expansion of the operational asset base over the five-year period.
- Aggregate Accruals Fluctuations
- Cash-flow-statement-based aggregate accruals demonstrated high variability. The figures shifted from $257 million in 2020 to a negative value of -$196 million in 2021. A sharp increase followed, culminating in a peak of $1.99 billion in 2023, before moderating to $963 million in 2024. This pattern suggests periods of significant misalignment between reported accrual earnings and realized cash flows.
- Accruals Ratio Interpretation
- The accruals ratio provides a normalized view of reporting quality, showing a shift from 2.79% in 2020 to -2.09% in 2021. A critical spike occurred in 2023, where the ratio reached 17.85%, signaling a period where earnings were substantially driven by non-cash accruals relative to the asset base. Although the ratio declined to 7.59% in 2024, it remains elevated compared to the 2020 and 2021 benchmarks, suggesting that cash flow has not fully converged with accrual-based reporting to previous levels.
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