6 files on Quality of Earnings Triangulation

The question this chapter answers: Is the profit this company reports the kind of profit a bank can lend against?

THE FRAMEWORK, NAMED · QUALITY OF EARNINGS TRIANGULATION →

Make a call on any file and every option opens with how far it sits from the senior banker’s read. There is no score.

FILE 1 OF 6 · THE FIRST QUESTION

A services company's profit has risen four years running. Its operating cash flow, as a share of net profit, has gone 110%, 95%, 78%, 61%.

What do you read first?

FILE 2 OF 6 · THE FIRST QUESTION

This year a distributor's revenue note changed from 'recognised on delivery' to 'recognised on dispatch'. Nothing else in the notes changed.

What do you ask?

FILE 3 OF 6 · THE CALL

Profit is up. Debtor days have lengthened three years running. The notes have quietly dropped a sentence about 'conservative provisioning'. The audit opinion is clean.

Which do you believe?

FILE 4 OF 6 · THE FIRST QUESTION

A manufacturer applies to renew its facilities.

Net profit: US$5.0m
Operating cash flow: US$4.8m
Inventory days: 70 → 72
Receivable days: 45 → 44

Is there anything to chase?

FILE 5 OF 6 · THE FIRST QUESTION

A retailer's margin has held at 8%. Its stock now turns 4.3 times a year, down from 6.1. The notes are unchanged.

What do you ask about first?

FILE 6 OF 6 · THE CALL

A CFO explains that cash conversion fell to 55% because of 'one large contract paid in arrears'. Next year's projection shows it back at 100%.

Your read?

6 FILES · PICK A CALL ON ANY OF THEM

// THE WHOLE TRAY

The placement draws three files from each of the eight chapters and ends in a card of where you read from.

START THE PLACEMENT →