The Financial Shenanigans Checklist

Financial shenanigans are actions designed to misrepresent the true financial performance or financial position of a company or entity. Financial shenanigans can range from relatively minor infractions involving merely a loose interpretation of accounting rules to outright fraud perpetuated over many years. Keeping a check on these is very important while deciding if you should buy the stock or not. If you’re able to answer the below questions and none of the answers raise a red flag in your mind, then the company is safe to be invested in.

ü  Has the Company made too many Acquisitions which are Expensive?

ü  Is there too much Goodwill on the books that seems unjustified?

ü  Has the Company been borrowing continuously? Where are these borrowings being used?

ü  Have the Receivables of the Company been continuously increasing and Sales aren’t increasing at the same rate?

ü  Has the inventory of the company been continuously increasing but Sales aren’t increasing at the same rate?

ü  Have the margins been consistent or have they been fluctuating continuously?

ü  If the Net Profit of the company is increasing, is the CFO increasing along with it?

ü  Are there many Related Party Transactions for Purchase/Sales/Loans?

ü  Have there been many Extraordinary/Exceptional Items in the last 5 years?

ü  Is the company Capitalizing R&D & Interest Costs or is it taking them as Expenses?

ü  What is the opinion of the Auditors?

ü  Have Auditors been changed recently?

ü  Is the Company making enough Disclosures?

ü  Are you able to understand their business from their Investor Presentations/Annual Reports/Management Interviews?

ü  Is enough information being provided?

ü  Have there been any sudden exits from the Top Management/Board of Directors?

ü  Is the company increasing Dividend by Increasing Debt?

ü  Is the Promoter connected politically?

ü  Are the promoters being investigated by any Government Agency? (It’s a big risk if yes)

ü  Are there any accidents/fire incidents/lockout/protest by labourers happening regularly at their Factory Premises? (If it’s a Manufacturing Concern)

ü  Is there a large amount of Other Income in the company's financials?

ü  Are you feeling comfortable when you hear the management on a conference call?

(For further information please refer The Management Checklist )

ü  Do you feel that the management is boasting too much and won’t be able to achieve what they are saying?
(For further information please refer The Management Checklist )

If you get a satisfied answer to all the above questions, then the stock is safe to be invest in. But there is still one more step left before you decide to invest in the stock: The Industry Analysis.