There has been a recent investor crisis in confidence in accounting
numbers that has influenced the stock market. I'd like some direction
on how to spot accounting shenanigans. I want five indicators of
financial condition that I could use to measure the health of a firm,
and explanations of how to use each of them. The indicators should be
based on accounting data found in annual reports. The indicators
don't have to be super-fancy, just useful. The indicators should go
beyond standard profitability ratios (e.g., ROA, ROCE), standard
operating margin analyses (e.g., COGS/sales, selling and
administrative/ sales, income taxes/ sales, and operating margin
ratio), standard short- and long-term liquidity ratios, and regular
market price ratios (P:E, EPS, and book value per share). Again, the
indicators should help assess the financial condition of a company in
a way that limits manipulation by managers. |
Clarification of Question by
defaultuser-ga
on
21 Mar 2003 18:02 PST
Hi, Tocayo. Thanks for the comment. Rather like a courtship. I hope
for an answer less enigmatic than the comment.
I’m assembling ideas that might be examined by a professional.
Nevertheless, the answer should be comprehensible by a student. I’m
trying to gain knowledge on the purpose and elements of financial
statements, and learn methods of gathering, summarizing, and analyzing
financial data.
The answer should be useful in manually comparing two companies'
accounting data with a mind toward analyzing which company is the
better investment from the point of view of potential investors. I'm
thinking five different indicators (probably ratios, but what do I
know?) using numbers found on an income statement, balance sheet, or
statement of cash flows. Ratios that reduce the impact of low-quality
numbers on the analysis. Ratios analyzing risk and profitability.
From my own thinking, one or more might be related to cash flows and
ability to cover debt, another to trends over time. Maybe one related
to stock price. I'm not picky, as I'm trusting the expert.
Its just that ROAs and EPS and the lot that I mentioned are
uninspired, and it seems that a company's management can easily
manipulate them. I recognize that all accounting data depends on
estimates, but what five indicators does an expert believe would
provide the best assessment of the health of a firm and reduce the
opportunity for intentional deceipt?
For the present question, I'd prefer useful over original.
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