Last issue, we discussed our financial subsidiary adjustment. This adjustment helps rectify the incongruence in balance sheet accounting between operating companies and their bank-like financial subsidiaries.
For a bank, its assets are akin to a normal operating company’s liabilities and vice versa. This is because traditional loans (which represent liabilities to a retail company, as an example) are actually the bread and butter of how banks conduct business and make profits....
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Mitsubishi Group is a classic Japanese conglomerate.
Also known as “Keiretsu” in Japanese, it is a series of cross-share holdings that form a complicated corporate structure under a single business group....
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It is a great compliment to say something ages like fine wine.
It means that something has gotten better over the years. Over time, fine wine develops a more nuanced and complex flavor that is often thought of as higher quality. Similarly, a person who has “aged like fine wine” has gotten better over the years, often by becoming more dashing in appearance or more well-rounded in personality...
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Three months ago, in Clay Tokens, we covered the concept of excess cash…
Specifically, we discussed how not all cash is created equal. As Benjamin Graham identified in The Interpretation of Financial Statements in 1937: “there is a tendency to hold more cash than the business needs.”...
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What does it mean to be “special”?
Many folks typically think of things that imply being “better than” or “greater than” when it comes to something being “special.” Think special events, special promotions, or special athletes…...
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The primary focus of investors can be summarized by one word: returns.
Namely, investors would love to know how much of a return they will make on the capital they invested in a given investment. Of course, this is all but impossible in practice. Instead, investors often must settle for looking back at the returns they have made....
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Folks in finance often use the phrase “cash is king.”
These three words are used to describe different financial concepts, from a belief that cash is more valuable than other investment tools to an emphasis on cash in analyzing businesses to the importance of cash flow for the overall health of a business....
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In our most recent issue, we highlighted how M&A accounting violates the matching principle and misrepresents economic reality by consistently underreporting the profitability of an acquired company. This causes multiperiod distortionsin the acquiring firm’s income statement...
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When I teach advanced accounting to up-and-coming future accountants, I have to tell the students to just memorize GAAP rules and do what the standards tell them to do...
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Professor Baruch Lev is one of the foremost academic experts when it comes to analyzing the impact of deficiencies in corporate financial reporting....
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This month, we turn to another all-time great value investor the co-founder of legendary hedge fund Baupost Group, Seth Klarman—for his take on financial reporting deficiencies in general and the focus of this month’s report… inflation or more accurately, currency devaluation....
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Last month, we highlighted Warren Buffett and his distaste for GAAP and IFRS accounting standards.
When Warren Buffett talks, his comments are worth listening to. And if you were not already aware, Buffett has said a great deal about problematic accounting standards....
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I recently had a wonderful conversation with Ralph Nach. Ralph is a former co-author of the Wiley GAAP Guide. He teaches continuing professional education courses for practicing CPAs on many of the most difficult and complex accounting topics. Ralph was also one of the very first members of the UAFRS Advisory Council for Uniform Accounting....
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Whitman built impressive investment results over decades. While he accomplished this feat, Whitman also found time to call out the problems with as-reported financial statements under GAAP....
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No industry is free from the inconsistent rules of GAAP accounting that create extensive distortions from economic reality. In this issue, we highlight a chemicals company, a payroll servicer, and a diversified industrial conglomerate. Everything from net earnings to total assets is calculated in ways that seem almost arbitrary under Generally Accepted Accounting Principles....
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Stock-based compensation (SBC) is an accounting headache. Just last year, PwC published a 250+ page report to help its clients navigate its intricacies....
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In mid-1998, Coca-Cola’s (KO:USA) stock price traded at a high of about $88 per share. Almost eight years later, the firm’s stock price stood at half that mark: $44. Did the company lose their incredible competitive advantages?
Around the same time, an incredible stock price run was taking shape. A major discount retailer watched as its stock price soared more than tenfold from 1996 to 2000. It wasn’t Wal-Mart, Best Buy, or some other popular store. It was AMES Department Store, which was bankrupt by 2002....
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Arcane Accounting Mathematics: Destroying Valuations and Shareholder Wealth
Traditional financial analysis metrics tend to muddle our insight on the intrinsic value of a company. Rather than focusing on the ability of a company to create value, which is the primary goal of the intermediate to long-term investor, these metrics lead the investors to focus on activities that do not necessarily contribute to the creation of shareholder wealth....
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Investors, other analysts, and management often rely on cash flows reported in the financials as a foundation of performance analysis and valuation. Unfortunately, those cash flows are not what they appear to be.
Many use the statement of cash flows (such as “cash flows from operations”) for judging earnings quality, measuring performance, and as key elements of discounted cash flow analysis. The cash flows reported from operations, however, are not truly from operations. Cash flows for financing do not accurately report the company’s financing activities. Cash flows reported for investing simply are not what the financials would purport....
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Home Depot (HD:USA) was a darling of the investing public from 1985 until 2001, with returns in excess of 20x the market over that period. In the era of the tech market and the internet boom, a home improvement retailer was one of the best performing stocks for a 16-year period....
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