Thursday, April 16, 2015

Getting conviction: Fundamental Factors #2

In the previous post we learned the board metrics to judge the fundamentals and a couple of things to watch out for. Unfortunately there are several other things to watch out for.

Continuing the list (of things to watch out) for:
3.        Expensing or capitalizing grey area items – for example some companies may capitalize and show as cash flow from operations their research and development costs. What needs to be determined is that whether the item capitalized actually has long term value. You also need to study how previously capitalized grey area items are depreciated.

4.        Subsidiary accounting – the consolidation of subsidiary accounts needs to be studied carefully as well. If the subsidiaries are not 100% owned then the ownership structure needs to be studied along with minority interest accounting. If the majority of the revenue is in the subsidiaries and the subsidiary structure is complex you need to be worried sick about corporate governance.
5.        Credit rating – if the company is rated by a credit agency it is useful to read about it. Please DO NOT believe the credit rating blindly without forming your own opinion as most credit ratings are paid for by the company getting rated.

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