What every serious potential investor (like me) will ask before considering an investment in yourcompany.
Are these sales imaginary?
Companies don’t go bust through lack of profits. They go bust through a lack of cash. It’s true. Very true!
Speaking of cash, it’s important to realise that thanks to accounting rules, a Company can book sales revenue long before the cash actually comes in the door. In the worst-case scenario the cash never comes in the door! And that can drastically affect the price I should be paying for the shares.
How can I tell if this is the case? Often it’s clearly spelled out in the Company’s filings.
Consider the illustrative example of a software company which has decided to switch to a more aggressive but allowable accounting method which would enable it to book sales revenue as soon as its software was shipped to the distributors – rather than wait until the end user had actually purchased it.
Sometimes the warning signs of revenue manipulation are more subtle. For instance, companies whose sales are increasing at a far faster rate than those of its competitors. You see, potential investors like me didn’t get where we are today by not doing our homework – and doing it thoroughly!
I’ve a right to be suspicious
I and my peers are wary of companies whose sole source of sales growth appears to be from gobbling up other companies.
If a firm is averaging more than a couple of acquisitions a year, the motive is likely to be management’s desire to satisfy somebody else’s short-term expectations – rather than mine. Over the longer haul, integrating a bunch of disparate companies into one larger one can get messy and costly. As for me, I invest for organic growth rather than acquisition. I’m by no means alone in this. On the other hand,there are numerous other potential investors who take the contrary view.
Meanwhile . . .
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