I finished up Quality of Earnings by Thornton L. O'glove which provides insights regarding the ways in which companies can get cute with the numbers and accounting in their financial statements and annual reports. Some of the highlights:
-Take note of a company whose inventories are increasing at a far greater pace than sales. Or even within the category of inventory itself, where finished goods are growing at a much quicker clip than the raw materials component. Both can be indicators of a slowing business and a back up of product because of declining demand.
-Pay attention to accounting changes by a company from one year to the next that can boost earnings. Such as slowing down the depreciation of assets, switching from LIFO to FIFO (or vice versa depending on market conditions), or increasing the projected rate of return on pension assets (thereby lowering the contribution that the company has to make each year).
-On the flip side, where expenses increase in a given year because of greater marketing costs (I can think of at least one company where this might help), don't necessarily get distracted by the current results and pay attention to whether it will bring a boost later.
-Be wary the company whose earnings have increased, but where there is also a meaningful increase in interest expense as a percentage of pre-tax income.
Overall, a quick and useful read.
