05-03-2012, 03:04 PM
Financial Shenanigans is also a good book on catching red flags. I'm reading the 3rd edition at the moment. However it does presume you already know how to read and interpret financial statements.
I haven't found a book yet that explains how accounting differs across industries.
However one potential pitfall I know of is leasing. Without a thorough understanding of how the leasing company recognizes income, you can get tripped up. There are different methods to recognize income, all legitimate, but they can front-load the income, spread it out, or back-load it. At steady state it makes no difference, but when the company is doing better or worse than normal, you need to know whether the improvement/deterioration is already reflected in recent results or is yet to come.
Likewise with off-balance sheet items. You need to read the notes to the financial statements carefully to figure out whether there are hidden liabilities. Sometimes they take the form of leases (sale-leasebacks, rental contracts), other times they take the form of purchase/sale commitments (raw materials, mine output, traded commodities).
But mostly, it's about experience. Only after looking through hundreds of companies can you get a sense of what type of numbers are typical for various industries. It's like any other activity - the more you do it, the faster you get, and the better your intuition.
I haven't found a book yet that explains how accounting differs across industries.
However one potential pitfall I know of is leasing. Without a thorough understanding of how the leasing company recognizes income, you can get tripped up. There are different methods to recognize income, all legitimate, but they can front-load the income, spread it out, or back-load it. At steady state it makes no difference, but when the company is doing better or worse than normal, you need to know whether the improvement/deterioration is already reflected in recent results or is yet to come.
Likewise with off-balance sheet items. You need to read the notes to the financial statements carefully to figure out whether there are hidden liabilities. Sometimes they take the form of leases (sale-leasebacks, rental contracts), other times they take the form of purchase/sale commitments (raw materials, mine output, traded commodities).
But mostly, it's about experience. Only after looking through hundreds of companies can you get a sense of what type of numbers are typical for various industries. It's like any other activity - the more you do it, the faster you get, and the better your intuition.