We analyse the accounting numbers with a significant emphasis on earnings quality, we look for inconsistencies in the accounting figures, we aim to form an opinion on their reliability.
For example some companies go through frequent restructuring, mergers and acquisitions or use several holding companies (with large and numerous minority interests) or apply questionable accounting choices about recurring/non-recurring expenses and income, or make accounting assumptions in order to report lower debt or higher revenues etc… In these cases the accounting records may not be very useful for valuation purposes. This kind of accounting issues are not well identified when performing screenings with popular financial terminals.
We also verify other accounting aspects and indicators such as causes for auditor’s resignation, management incentives etc.
The result of our valuation may imply that a security, should be sold, bought or hold. The earnings quality filter, is a first step in our valuation process. If we are not comfortable with the reliability of the financial figures, then the valuation is compromised and our analysis may imply that a security should be sold.
Avoid losing money, every bomb avoided improves the performance of your portfolio.