Recounting Accounting

By |2018-11-14T06:11:02+00:00November 14th, 2018|Global Market Update|

What’s wrong with accounting? Public Domain. Source: Life of Pix I remember the first time I encountered a detailed balance sheet. I’d been hired to implement a new analytical system at a small bank, and I was looking at their internal accounts. “Oh, don’t look at that month,” I was told. Why? That month was a little special. The State where they were located gave the bank a special tax credit for holding US Treasury Notes on that month-end, and this small bank had [...]

Cooking the Books?

By |2018-11-07T06:18:32+00:00November 7th, 2018|Global Market Update|

What good is financial reporting? Photo: Chantal Pare. Source: Flikr. CC-BY-2.0. That may be a funny question from a Chartered Financial Analyst, but financial statements often distort, rather than reveal, the nature of a company. Beyond outright fraud, where managers just make things up, there are lots of examples of accounting practices that are misleading, like marking everything to market. During the financial crisis, when companies got into trouble their debt was downgraded. Ironically, this created an earnings boost, because their debt suddenly got [...]

Go with the Flow

By |2018-05-21T07:03:01+00:00May 21st, 2018|Global Market Update|

What is “free cash flow”? Photo: Redmark. Source: Wikipedia Free cash flow is an accounting term that measures how much cash a company can generate from its business after taking out capital expenditures – money spent for new computers or new buildings or new delivery vehicles. It’s the cash that’s left over after you spend what you need to keep the business going and growing. It’s important: it allows companies to pursue new opportunities without relying on the kindness of their bankers, or the [...]

Double Entry Computing

By |2017-11-08T06:07:43+00:00November 8th, 2017|Global Market Update|

Why is finance so dumb? Photo: Helloquence. Source: Unsplash In an era of mobile computing and 3-D printing, financial analysis is stuck in the ‘80s. The principal tool of the analyst is the spreadsheet -- something that Lotus 1-2-3 popularized in 1983. While our PCs can access big data and execute cloud-based massively parallel computing, spreadsheets still have the same machine-code A1 cell-structure. The most advanced Excel function is a macro. Consequently, finance hasn’t moved past summing up columns and rows. Predictive algorithms and [...]

Accounting or Sales?

By |2017-07-17T12:21:19+00:00May 12th, 2017|Global Market Update|

Is this glass half full? Or half empty? Photo: Viktor Hanacek. Source: Picjumbo Sales types look out and see infinite possibilities. Accountants see the world as debits and credits, as a process to be managed. Sales-dominated organizations emphasize growth; accounting-centric firms focus on profitability. Put simply, sales brings in the dough, while accounting gets to the bottom line. Both are necessary to any successful enterprise. But there’s often a lot of conflict between the two. Sales people can feel like they own the business. [...]

The Merchants of Venice

By |2017-07-17T12:21:20+00:00April 27th, 2017|Global Market Update|

How do we know what a company is worth? Photo: X. Source: Pixabay We want to base our investments on facts, not feelings. One reason Apple is worth more than GM, even though GM has twice as many employees, is that Apple earns more – five times more – than the car giant. Both companies have iconic brands with global scale. But Apple is far more profitable . But how do we know this? We know it because of double-entry accounting: debits, credits, income, [...]

Lies and the Lying Liars with Fake Financials

By |2017-07-17T12:21:28+00:00March 9th, 2017|Global Market Update|

Can we find financial fraud in advance? Enron Logo. Source: Wikipedia Not always. But published financials can give us clues when managers might be cooking their books. Published financial statements are supposed to reflect reality: they’re supposed to give let us know how the business is doing in its day-to-day operations. But we live in a world where investors – and computer trading systems – often fixate on just one number: earnings per share (EPS). That number is supposed to the single best indicator [...]

Imports, Exports, and Economic Identities

By |2017-07-17T12:21:28+00:00February 23rd, 2017|Global Market Update|

Do imports reduce the size of our economy? Source: Econstories It’s not as simple as you think. Yes, C+I+G+X-M = Y. Consumer spending plus business Investment plus Government spending plus eXports minus iMports equals the total economy. On its face, if you reduce what you’re subtracting, the sum total should be bigger, right? It’s a little more subtle than that, though. It’s unclear which comes first, the size of the inputs or the size of the economy. Just because an equation describes something doesn’t [...]

Lost in Translation?

By |2017-07-17T12:21:30+00:00January 27th, 2017|Global Market Update|

Do currency exchange rates matter? Brazilian Real priced in Dollars. Source: Bloomberg More and more companies do business around the world. Toothpaste-maker Colgate-Palmolive has 30% of its sales in Latin America, but only 20% of its assets there. About half of their long-term assets are in Europe and the US. Clearly, they’re a global company with a global brand focused on basic needs. Their worldwide revenue growth has fluctuated, but their value has definitely grown over time. The shares have returned about 13% per [...]

What’s Cooking?

By |2017-07-17T12:21:38+00:00November 2nd, 2016|Global Market Update|

What good are financial statements? Photo: James DeMers. Source: Pixabay That may seem like a funny question from a financial analyst. But financial statements can distort, rather than reveal, the nature of a company. Beyond outright fraud, where managers just make things up, there are counterintuitive accounting practices that are misleading, like marking liabilities to market. For example, during the financial crisis, when companies got into trouble their debt was downgraded. This created an earnings boost, as their liabilities got cheaper when they were [...]