Book: Business Fairy Tales
Author: Cecil Jackson
Key takeaways: It’s a decent book overall, though I will concede that I have read a number of books on the topic and not surprisingly found a number of topics repeated and hence I was probably less enthused than an average reader would be. Here I will note only points that are incremental over the other books I have read.
- It is very important to see the record of the management. Even if they successfully sold a company to someone, it is worth following up and seeing how that company is performing and if the acquirer discovered any improprieties (case in point: Al Dunlap’s sale of Scott Paper to Kimberly-Clark).
- Look out for a sudden change in gross margin (it is very hard for a company to change this metric)
- If the company is inappropriately capitalizing assets, this kind of fraud often shows up in assets-to-turnover ratio (sales/assets or sales/PPE etc.)
- Keep an eye out for assets/liabilities of unconsolidated entities and SPEs. A growth in these can signal that the company is using these to hide debt or overstate earnings.
- Related Party Transactions–always the fun one
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