Terms
Terms
Channel Stuffing
We discussed these with examples of Parag Milk and Solara Active Pharma Science
After that we discussed the case studies for change in working capital. Working capital is the capital
that is required for the daily operations of the business.
We studied the case studies on the same with the example of Caplin Point, where trade receivable
days & inventory days are growing at a very high pace. We also saw the financials of its subsidiary
companies where they don't have any employees and also haven't paid any audit fees.
After that we understand the capitalization of pre operating expenses, Certain costs like Pre-
operating expenditure, capital expenditure, interest cost, R&D and Intangible assets can be
capitalised by the management as it is allowed by the accounting standards.
Capitalization of R&D cost is an aggressive accounting as we don't know whether it will be fruitful or
not in future so IMO it should not be capitalized, we saw the examples of the same where good
example have companies like AVT Natural, Laurus Labs and in bad examples we have Biocon and
HEG.
Post these we also understand the meaning of related party transactions and various case studies on
the same. Related Party Transactions means the transactions entered by the company with the
promoters/managers, their family members, and the companies/entities owned by them. High RPT
must raise doubts amongst investors about the willingness or intent of the management.
Forensic checklist:
Debt to Equity < 0.7 Misallocation of capital - check past track record of investing in non-
core business
Has the company shared the wealth with the shareholders historically? - Check Dividend
Payout & Share Buyback history
What is the EBITDA/CFO & CFO/PAT for the last 1, 3 & 5 years? - Higher the better
Does the promoter have private entities in the same line of business? • How high are the
Related Party Transactions compared to sales?
Is there any contingent liability that threatens survival? (Extremely high tax disputes in
Inox's leisures case)
What is the auditor's opinion & are there any red flags in the auditor's opinion (E.g:
Shankara Building Products)
What is the Gross Working Capital when compared to the industry? (GWC= Receivable
Days + Inventory Days)
How many times has the CFO changed in the last 5 years?
What percentage is the goodwill as a percentage of total assets? (Is the goodwill acquired
due to acquisitions in the non-c on-core areas)