2 Quick Techniques Investors Can Use To Protect Themselves From Accounting Fraud
- Large difference between Net Income and Free Cash Flow over multiple years can signal aggressive accounting or fraud.
- Return on Assets (ROA) and Return on Invested Capital (ROIC) multiples above industry averages can signal fraud.
- While these two techniques are powerful they are no substitute for thoroughly examining a companies financial statements.
In theory investors should thoroughly read a company’s annual and quarterly financial statements. But, let’s face it no matter how many times you say that people will frequently take short cuts. So, I want to focus on two readily available metrics that investors can look at that can help protect them from investing in fraudulent stocks or companies with accounting issues. In this article we’ll look at how investors can analyze the relationship between net income and free cash flow and a company’s Return on Assets (ROA) and Return on Invested Capital (ROIC) compared to peers to spot potential accounting issues. This article was published exclusively on SeekingAlpha.com and you can read the rest by following this link.