Thread by @MashraniVivek

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Protecting Downside and Capital Protection ensures best investing outcome

Here is the thread to understand various accounting manipulations and checks you should do...

>> First things first - CAPITAL PROTECTION is of utmost importance...

Signs that raises eyebrows:

(1/n)

- Frequent changes in auditor

- Strained relationship between promoters and auditors

- Disputes with auditors

- Frequent resignations from CFO / auditors / Independent directors

Example: bit.ly/3kU9VFh

These are early warning indicators

What's NEXT? Read ON

(2/n)

3 pillars of financial statements - Income statement, Balance Sheet, Cashflow statement

Bottom-line:

ALL 3 should tie-up with EACH OTHER....

Here are checks specific to each..

(3/n)

Income statement:

- Revenue recognition changes

- Recording bogus revenue

- Inflating income using one-off items

- Shifting expenses to later period

- Hiding expenses or losses

- Playing with reserves

- Inventory management

(4/n)

Balance Sheet RED FLAGS:

- Continuous increase in receivables

- Inventory blotting, unable to sell, money stuck consistently (signs of trouble)

- The longer inventory ages, the possibility that the company is misallocating cash

(5/n)

Hand in gloves RED FLAGS:

- Frequent capex without incremental free cash flows is also sign of mismanagement of cash

- Acquiring related party or promoter entities at high valuation and creating goodwill on balance sheet is also common way to hide / siphon cash

(6/n)

How Does WORKING CAPITAL plays role:

- This is done by reducing accounting receivables, expanding accounts payable and reduction of inventory

Check for consistency, industry trends, concall replies to validate further...

(7/n)

Ultimately CASH is KING...look for CASH trail...

- Check for cash yield - yield earned on cash, investments and deposits

- Look for evidence like actual tax payments, dividends etc. which is tough to manipulate

- Look for inconsistencies in debt increase / pledging

(8/n)

RELATED PARTY TRANSACTIONS:

- Higher proportion of transactions with related party are generally raises concerns

- Check for loans and advances to related parties with favorable terms

(9/n)

Read Auditor's opinion report...look for discrepancies..

- The report along with financial statement from Auditor covers many comments about the company

- This brings out approach of management and any potential areas of concern in relation to the company

(10/n)

Some books for further reading...

List: amzn.to/33dgP2v

If you want to learn more about TechnoFunda Investing and Compounding your money, join my upcoming masterclass:

technofunda.co/webinar

Thanks for reading...hope you liked it..