A Quick Walk Through the Recent Age of Miracle, Wonder & Other Lies

It has been a wild couple of years for financial statements.  And by “wild,” we mean the quality of financial accounting information hit lows we could not have imagined.  Let’s start with the basics.

The concept of accounting quality is predicated on the idea that financial reporting is designed to provide financial information that is both relevant and faithfully represents a company’s actual financial condition.  Financial reporting quality is essential to maintaining vibrant and healthy capital markets.  It is that simple.

KCR’s equity research team has been at this for a combined 55 years and has been publishing research via KCR since 2010.  The academic on the team teaches accounting and is a blue-chip name in the field of behavioral finance. We cannot recall accounting distortions being this severe.  Ever.

Things are so off the charts that the new head of the SEC led out by implying that the sponsors of a company promising final mile delivery in…outer space had misled investors.  We would later pan the improbable promises of Lilium, valued at $3.3 billion, which asserted they would revolutionize short-haul flight with yet to be built battery powered mini-planes.

Dishonesty like this led famed short-seller, Jim Chanos, to dub this “The Golden Age of Fraud” in an article for the Financial Times.  Short sellers are often made into villains.  But with hindsight, the world often wishes the good ones’ warnings were heeded earlier.  We will venture a guess that the thousands of Enron employees who lost everything wish regulators paid more attention to investors like Mr. Chanos.

Why Does Earnings Management and Earnings Quality Matter in One Chart – Small & Mid Cap Universe

KCR’s equity ranking tools offer proprietary calculated information on 95 metrics in five major buckets.  Those buckets are Valuation, Balance Sheet, Earnings Quality, Analyst Quality, and Market Quality.  The chart below omits 4 out of the 5 buckets – not something we recommend – and shows the compound returns to the top-ranked 10% and bottom-ranked 10% stocks based on our Earnings Quality score. 

Small Mid Cap Stocks with High Quality Earnings Obliterate Stocks with Low Quality Earnings

For those interested in the data from our S&P500 Universe, please reach out to

research@nullkailashconcepts.com

YOU ARE NOW READING BASIC MEMBER LEVEL CONTENT

The Importance of Accounting Quality in Four Quick Charts

The chart below shows:

icons8 vertical line 50
icons8 lock 50

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.