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% | 49.06% | 18.08% | — | — | |
| Home Depot Inc. | 15.25% | 9.91% | 21.77% | 2.66% | — | — | |
| Lowe’s Cos. Inc. | -2.92% | 2.66% | -12.39% | 6.39% | — | — | |
| TJX Cos. Inc. | 30.23% | 73.65% | -109.84% | 15.53% | — | — | |
| Balance-Sheet-Based Accruals Ratio, Sector | |||||||
| Consumer Discretionary Distribution & Retail | 16.15% | 26.47% | 31.88% | 12.49% | 200.00% | — | |
| Balance-Sheet-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 11.73% | 12.34% | 15.91% | 5.08% | 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.
| Financial ratio | Description | The company |
|---|---|---|
| Balance-sheet-based accruals ratio | Ratio is found by dividing balance-sheet-based aggregate accruals by average net operating assets. | Using the balance-sheet-based accruals ratio, RH deteriorated earnings quality from 2022 to 2023. |
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% | 48.44% | 23.04% | — | — | |
| Home Depot Inc. | 14.43% | 8.24% | 14.26% | 0.66% | — | — | |
| Lowe’s Cos. Inc. | -4.62% | -0.14% | -17.28% | 6.85% | — | — | |
| TJX Cos. Inc. | 23.97% | 55.57% | -121.39% | 14.48% | — | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Sector | |||||||
| Consumer Discretionary Distribution & Retail | 0.41% | -4.02% | 29.06% | 14.86% | -9.94% | — | |
| Cash-Flow-Statement-Based Accruals Ratio, Industry | |||||||
| Consumer Discretionary | 4.90% | 1.96% | 12.28% | 3.83% | -8.48% | — | |
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.
| Financial ratio | Description | The company |
|---|---|---|
| Cash-flow-statement-based accruals ratio | Ratio is found by dividing cash-flow-statement-based aggregate accruals by average net operating assets. | Using the cash-flow-statement-based accruals ratio, RH deteriorated earnings quality from 2022 to 2023. |