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Money Map Press’ Keith Fitz-Gerald on why some companies misrepresent their performance on earnings reports.
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Eight and the information that companies are giving them Keith FitzGerald is the chief investment strategist for months now pressed eat great to have you back on a -- Thanks for having -- -- -- to be here.
This news I mean does it surprise you and you think the numbers really 20%.
Actually I think the numbers a lot higher and no it doesn't surprise me because we have a system that set up to encourage this kind of behavior.
We require by -- quarterly performance reporting when many business cycles are in fact a year 23 even four years.
So you have a disincentive to actually report what's happening in an incentive to pad the numbers.
Yeah I -- when they talk about exactly how it happened you know one of this -- us as well.
You know we know we're gonna get about a dollar fifty earnings per share we realized you know that we could change a few things to me either make -- -- dollar 45.
Our dollar 55 depending on what would benefit -- the most and one of the reasons they said they do it is of course.
We had to impact the share price and also impact their own compensation this is -- not happy.
The whole system.
Well it certainly challenges my faith in the system in this is one of the things I constantly harp on if investors are going to look at this information should be huge slap in the face.
They should concentrate on those businesses with high cash flow.
Because the old joke in the industry is nobody ever went broke on accrual accounting and that's what's jamming everything right now.
Yeah in fact that's a great point -- -- -- being made a number of points about what to look out for.
-- cash flow as you said that something that always catches up that you can't cover for very long.
Some other adage sure signs are deviations from what's going on in the industry right.
Yes.
And also if a business starts building up huge reserves that's a dead -- to -- this CD BC level executives know that something's coming down the pipeline for example.
Litigation may -- -- product isn't working -- got a recall pending but there's something going on that they're building up reserves and -- moving money around to protect against it.
Yes some other things to look out for lots of her curls also one thing you mentioned that when earnings are too smooth there too even to predictable that's when you know something's going on.
Absolutely.
And then also -- large frequent one time special items why is this -- -- -- Well this is.
Interesting because anytime a company's got to take a large one time charge there's some thing that they simply don't want to acknowledge or they want to sweep under the carpet and taking a one time charge.
It's a way to get on the street get it out on the open.
But yet not have to deal with a quarter after quarter after quarter why this -- legal.
Well you know you've gotten -- the powers that be have decided that accrual accounting is a great way to go I frankly don't agree with a lot of it because I think it introduces financial hocus pocus and in fact masks the true picture of the fate of health many of these companies.
I'd love to see a return to more cash based accounting.
Yeah I mean if we made it its almost like that tax -- if you made it more straightforward more easy for people understand the information would be better.
And I don't feel like these kind of reports make the average investor feel like the game is rigged why even bother right.
Well that's true but you know what again.
Despite the fact -- a few bad apples out there in this is a commonly accepted practice if you know what to look for some of the things we just talked about.
You can get into those industries that have real cash flows experienced management don't play a lot of gains in some of those big things are in the energy sector for example.
Or in that died that things like Altria for example where you've got consistent demand in dividends because those are like a cash promise to shareholders they're going to be less inclined to screw around with the numbers if they've got to make that payment now.
-- Keith thanks so much for your -- Thank you.
