Leverage is one of the major causes of a firm’s distress. It is not just limited to patently reported statistics of financial ratios, but is rather a deep issue. Often (not always!) straightforward and disclosed leverage on the balance sheet will get adjusted in prices, embedded in risk premiums; however it is the hidden leverage which will be more ominous. Read More
Distress investing is mostly thought of as investing in companies that are in deep trouble, especially financial distress. However if one thinks a bit further and looks below the generally accepted misconceptions one will be able to decipher large mispricing, viz. wide gaps between prices driven by short term selling pressure versus long term fundamental value. This article tries to clarify misconceptions and its objective is to further lay down sound principles and detail some relevant cases in the future. Read More
While cash flows have been used as a guide to indicate the health of a company, just looking at cash flows is not enough. Multi-Act experts conduct an analysis of 3 companies,in the auto parts retailing industry, a highly favoured segment amongst investors and analysts. You’ll see why investing in auto part retailers may not be wise under certain circumstances. As we analyze 3 companies in the following areas, discover fundamental traits that should make investors skeptical:
- Profitability: Margin Cycle
- Cash Flow Generation: Working Capital
- Cash Flow Utilization: Capital Allocation
Anyone reading a company’s financial reports should be aware of the assumptions and estimates used by the preparer of the report because it can lead to a distorted picture of a company’s performance
In this article, Multi-Act experts analyze the financial reports of a major airline company and uncover key assumptions in calculating yearly pension cost. In this case, higher assumption of expected return can lead to lower pension expenses and higher earnings. Assumption relaxation in revenue recognition was observed by another major airliner thus boosting revenues and earnings in their reporting period.
Investors need to pay close attention to assumptions and estimates that may be used by the preparer of any report. The examples of these airline companies give a clear picture of how assumptions can be used to project companies in better light.
“Figures often beguile me…particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice and force: ‘There are three kinds of lies: lies, damned lies, and statistics.” – Mark Twain
Had Mark Twain seen the financial statements of various companies, he would have exclaimed- “Lies, damned lies, statistics and accounting”.
Fundamentalists believe that the cash flows in a company’s book never fail to provide a realistic picture of the business’ current state. However, sometimes sale of receivables can help keep the debt off-balance sheet and result in much better reported cash flow performance. Read More
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Can investors be hoodwinked by a company’s revenue and profit figures? Multi-Act experts discuss how a global consumer technology company changed the revenue recognition; misleading investors to believe that they have had massive growth in revenues and profits over the past decade. This revenue recognition case study explains how they achieved this over four periods of revenue recognition methods and its implications for analysts. You’ll learn why it’s impossible for analysts to show reliable trends; resulting in a precarious situation for investors. Read More
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As some of the best-performing stocks, many consider U.S. Utilities stocks a safe haven paying steady dividends with moderate risk. Assured return close to 11% shows why investors are attracted to this sector making them a bright choice in bear and bull markets. However, there is a caveat: Whenever rates rise, the value of these may drop. With the Central Bank’s repressive rate policy, we believe investors should show caution when making investments in U.S. Utilities equities.
This article discusses how U.S. interest rates seem to have given rise to a cyclical trend within the Utilities sector. Read what has been driving the sector’s current valuation growth.
Ever made an investment decision based on market hype? Multi-Act experts review a Chinese e-commerce company headed by a celebrated personality that appears to be outdoing its competitors. While the company seems to be a victor; a careful quality of earnings analysis by our team reveals some creative accounting practices that investors should not ignore. Analysis includes the company’s:
- Adjusted Non GAAP EBITDA and Net Income
- Capital Allocation
- Low Tax Rate Sustainability
- USD Denominated Debt
Questions arise about the said company’s profit margins, cash-flows and valuation. Read how this can impact investor decisions.
A well-known peer-to-peer lending company, which came out with an IPO in 2014, has a $2.7 billion market cap. The company operates an online platform that enables borrowers to obtain a loan, and permits investors to purchase notes backed by payments made on loans.
Investment decisions need to be based on rational analysis and void of behavioral bias. However, markets often act without clinical analysis and prefer different type of assets in different phases. One such example is emerging across the growth stocks and value stocks, where the favor or disfavor for a particular class changes over the course of a market cycle. Read More