Second day, Second thread.
Because momentum ftw!
Twenty three SMALL checks to run that will help you avoid BIG investing mistakes!
Please do RT if this adds value - will really help me grow my small business! ♻️
Because momentum ftw!
Twenty three SMALL checks to run that will help you avoid BIG investing mistakes!
Please do RT if this adds value - will really help me grow my small business! ♻️
1. Receivable Days Expansion
Receivables growing faster than sales could be a sign that management is either stuffing the channels, or recording revenue too soon. Expanding receivable days is almost always a cause of concern.
Receivables growing faster than sales could be a sign that management is either stuffing the channels, or recording revenue too soon. Expanding receivable days is almost always a cause of concern.
2. Frequency of changes in Revenue Recognition
Important for services and project driven companies; Frequent alteration or aggressive recognition can report a higher revenue than earned
Important for services and project driven companies; Frequent alteration or aggressive recognition can report a higher revenue than earned
3. Defferred revenue contraction
Deferred revenue is a store of future revenue. This line item growing slower v sales indicates management might be recording sales more aggressively or company moving towards shorter tenure contracts!
Deferred revenue is a store of future revenue. This line item growing slower v sales indicates management might be recording sales more aggressively or company moving towards shorter tenure contracts!
4. Rising Receivable Bad Debt
Companies sometimes sell to less creditworthy parties to boost sales. When the parties don't pay the receivables, it reflects as receivable bad debt.
Companies sometimes sell to less creditworthy parties to boost sales. When the parties don't pay the receivables, it reflects as receivable bad debt.
5. Inventory days not in-line with sector
If company's inventory days are significantly higher than sector it might indicate either slower movement of inventory or aggressive valuation of the inventory at hand
If company's inventory days are significantly higher than sector it might indicate either slower movement of inventory or aggressive valuation of the inventory at hand
6. Excessively high management compensation
Excessively high fixed remuneration as % of PAT can be a sign of rising management greed, especially if promoters hold key managerial positions.
Excessively high fixed remuneration as % of PAT can be a sign of rising management greed, especially if promoters hold key managerial positions.
7. Management Incentive Structure
Remuneration linked to sales can drive empire building and unnecessary M&A; Ideal linkage to an earnings/free cash per share metric.
Remuneration linked to sales can drive empire building and unnecessary M&A; Ideal linkage to an earnings/free cash per share metric.
8. Management frills and thrills
Managements are compensated for rent, house servants, cars, private jets, and trips - keep and eye on these misc allowances!
Managements are compensated for rent, house servants, cars, private jets, and trips - keep and eye on these misc allowances!
9. Related party transactions: Promoter or promoter group borrowing/lending
Look out for excessively low rates while lending either to promoters or promoter entities via ICDs, or excessively high rates while borrowing from promoter entities
Look out for excessively low rates while lending either to promoters or promoter entities via ICDs, or excessively high rates while borrowing from promoter entities
10. Key material procurement
Calculate cost item as % of sales if firm procures key raw material from a related party; an increasing trend is a negative sign
Calculate cost item as % of sales if firm procures key raw material from a related party; an increasing trend is a negative sign
11. Royalties and other contractual outflows
One risk is brand/key intangible lies outside of the firm; the second is an increasing trend in the money the parent expects for that intangible asset
One risk is brand/key intangible lies outside of the firm; the second is an increasing trend in the money the parent expects for that intangible asset
12. Death by a thousand cuts!
Measure scale of other expenditure by the firm under analysis with related parties - this can include stay at RPT hotels, food/travel spend with RPTs and more. Small expenses combined can add up to big outflows!
Measure scale of other expenditure by the firm under analysis with related parties - this can include stay at RPT hotels, food/travel spend with RPTs and more. Small expenses combined can add up to big outflows!
Before we continue a short introduction to GSN Invest Edge! easebuzz.in
200 businesses analyzed + a detailed forensic analysis primer & checklist + elite Whatsapp community = Unlimited learning in 2023! Come join our tribe and accelerate your learning!
200 businesses analyzed + a detailed forensic analysis primer & checklist + elite Whatsapp community = Unlimited learning in 2023! Come join our tribe and accelerate your learning!
13. Excessive M&A frequency
Firms that pursue M&A too frequently make it difficult to track like for like metrices and often use this to mask weak underlying financials
Firms that pursue M&A too frequently make it difficult to track like for like metrices and often use this to mask weak underlying financials
14. Excessively large M&A
Excessively large M&A compared to the size of the acquiring firm adds significant integration and financial risk, could point to empire building motives of promoters
Excessively large M&A compared to the size of the acquiring firm adds significant integration and financial risk, could point to empire building motives of promoters
15. Excessively high Goodwill
Excessively high goodwill can indicate management overpaying for acquisitions or being overly acquisitive - again not a very good sign!
Excessively high goodwill can indicate management overpaying for acquisitions or being overly acquisitive - again not a very good sign!
16. Intangible accounting and capitalization
Firms can sometimes capitalize certain costs into intangibles instead of expensing it. Look for large growths in intangibles & intangible growth materially faster than business turnover growth.
Firms can sometimes capitalize certain costs into intangibles instead of expensing it. Look for large growths in intangibles & intangible growth materially faster than business turnover growth.
17. Weakening of EBIT/Interest Expense
Lowering of EBIT/interest expense indicates lower ability of the firm to pay up its debt financing costs. You ideally want a healthy interest coverage (5x+) through the cycle.
Lowering of EBIT/interest expense indicates lower ability of the firm to pay up its debt financing costs. You ideally want a healthy interest coverage (5x+) through the cycle.
18. Auditor or key director or CFO resignation frequency
Frequent resignations of auditors, CFO, or board directors is a red flag that the firm's actions might not be in line with regulation
Frequent resignations of auditors, CFO, or board directors is a red flag that the firm's actions might not be in line with regulation
19. Board & key committee independence
You want qualified & independent directors in your board & key committees (audit & nomination). Promoter controlled board and committees are always a risk!
You want qualified & independent directors in your board & key committees (audit & nomination). Promoter controlled board and committees are always a risk!
20. Auditor salary
Auditor salary rising materially faster than revenue could be a sign that the auditor might be in on cooking the firm's books!
Auditor salary rising materially faster than revenue could be a sign that the auditor might be in on cooking the firm's books!
21. 'Adjustments'
Adjustments to accounting standards, frequent restructuing charges, adjustments, write-offs are strong red flags if found as recurring instances
Adjustments to accounting standards, frequent restructuing charges, adjustments, write-offs are strong red flags if found as recurring instances
22. Rate of Depreciation/Amortization
Depreciation can be artificially slowed by increasing salvage value, extending life of asset etc; Look out for sharp drops in Dep/PP&E!
Depreciation can be artificially slowed by increasing salvage value, extending life of asset etc; Look out for sharp drops in Dep/PP&E!
23. Never let your guard down!
As investors we let our guard down with certain kind of firms - bluechips, mnc businesses, pms manager favourites. It is your job to be just as rigourous with your checks no matter how loved the firm!
As investors we let our guard down with certain kind of firms - bluechips, mnc businesses, pms manager favourites. It is your job to be just as rigourous with your checks no matter how loved the firm!
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