🙌 Brilliant post, Mannsher. Easily one of the most insightful breakdowns of the balance sheet I've come across. Looking forward to more of your work.
I do have a few questions I'd love your thoughts on:
1. Cash manipulation – How can we identify if a company is playing games with its cash position, especially tactics like window dressing (e.g., paying off liabilities just before the reporting date to inflate PAT)?
2. Bill discounting – How to find if a company might be using bill discounting to fudge numbers or inflate cash flows?
3. Non-controlling interest (NCI) – Any signals that suggest manipulation or misrepresentation of NCI on the balance sheet?
4. Lastly – and I could be wrong here – but is it fair to say that a good starting point for spotting forensic shenanigans is checking whether CFO (Cash Flow from Operations) closely tracks reported PAT? Or are there nuances that make this unreliable?
1. If a company’s cash flows doesn't explain how it paid down a large short-term loan by year-end, or if current borrowings drop while other liabilities mysteriously jump, it could be classification magic. Investors should also check notes for “post-balance sheet events” sometimes companies borrow right after year-end (which could indicate they held off till just after reporting).
Paying off a short-term loan at the last moment won't affect PAT in any way, it will make the balance sheet look stronger because debt ratios will appear to be better. B
2. If a company starts using bill discounting, it's Days Sales Outstanding number will drop significantly, if the management cannot explain the drop, they might be bill discounting. Compare the DSO number to other companies in the same industry to see if it is in the typical range
Plus always check the notes, the notes give you a detailed statement of receivables, if a company engages in bill discounting, it will be mentioned in the notes.
3. NCI itself is just a calculated figure, it is not typically “fudged” directly, the focus for forensic analysis is more on what’s not consolidated.
4. There are nuances like CFO takes into account all the working capital changes, now a company might increase sales and therefore it needs more receivables and inventory to fund the growth, so in a scenario like this the CFO will be lower than PAT. Using Free Cash Flow (FCF) is a much better indicator rather than CFO
Honestly, a fantastic read
Thank you, I am glad you found it to be a good read.
🙌 Brilliant post, Mannsher. Easily one of the most insightful breakdowns of the balance sheet I've come across. Looking forward to more of your work.
I do have a few questions I'd love your thoughts on:
1. Cash manipulation – How can we identify if a company is playing games with its cash position, especially tactics like window dressing (e.g., paying off liabilities just before the reporting date to inflate PAT)?
2. Bill discounting – How to find if a company might be using bill discounting to fudge numbers or inflate cash flows?
3. Non-controlling interest (NCI) – Any signals that suggest manipulation or misrepresentation of NCI on the balance sheet?
4. Lastly – and I could be wrong here – but is it fair to say that a good starting point for spotting forensic shenanigans is checking whether CFO (Cash Flow from Operations) closely tracks reported PAT? Or are there nuances that make this unreliable?
Would really value your perspective.
Thank you so much for your kind words.
1. If a company’s cash flows doesn't explain how it paid down a large short-term loan by year-end, or if current borrowings drop while other liabilities mysteriously jump, it could be classification magic. Investors should also check notes for “post-balance sheet events” sometimes companies borrow right after year-end (which could indicate they held off till just after reporting).
Paying off a short-term loan at the last moment won't affect PAT in any way, it will make the balance sheet look stronger because debt ratios will appear to be better. B
2. If a company starts using bill discounting, it's Days Sales Outstanding number will drop significantly, if the management cannot explain the drop, they might be bill discounting. Compare the DSO number to other companies in the same industry to see if it is in the typical range
Plus always check the notes, the notes give you a detailed statement of receivables, if a company engages in bill discounting, it will be mentioned in the notes.
3. NCI itself is just a calculated figure, it is not typically “fudged” directly, the focus for forensic analysis is more on what’s not consolidated.
4. There are nuances like CFO takes into account all the working capital changes, now a company might increase sales and therefore it needs more receivables and inventory to fund the growth, so in a scenario like this the CFO will be lower than PAT. Using Free Cash Flow (FCF) is a much better indicator rather than CFO