Economics

Quality of Earnings

Quality of Earnings

  • Downloads：8869
  • Type：Epub+TxT+PDF+Mobi
  • Create Date：2022-09-05 08:56:38
  • Update Date：2025-09-06
  • Status：finish
  • Author：Thornton L. O'glove
  • ISBN：0684863758
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Reviews

Zayed ，

This book teaches us about the information investors commonly overlook when analysing the financial performance of a company。 It teaches us about the important sections of financial statements and annual reports that are commonly overlooked and deserve special analysis。Though some of the information is dated， it also offers many timeless principles about investing。 The writer mainly uses practical examples of accounting gimmicks used by companies to inflate their share earnings， and how to avoid This book teaches us about the information investors commonly overlook when analysing the financial performance of a company。 It teaches us about the important sections of financial statements and annual reports that are commonly overlooked and deserve special analysis。Though some of the information is dated， it also offers many timeless principles about investing。 The writer mainly uses practical examples of accounting gimmicks used by companies to inflate their share earnings， and how to avoid pitfalls by investing in these companies。 It also offers examples of opportunities where an investor can profit from underestimated share earnings。 This book is especially relevant to serious investors in current times when stock prices are inflated， and decisions to invest must be carefully considered。 This book can be recommended to those who are already familiar with accounting concepts and wish to broaden their knowledge。 。。。more

Jannis Giavridis ，

Especially the parts where tangible examples are provided （most chapters of the book） are quite valuable。 Despite the use of lots of numbers things are still kept relatively reader friendly compared to other investment books。 Would recommend

Dennis Ooi ，

Thornton was very thorough with his examples， though it was rather dense at times due to the amount of words used to explain changes for instance。 Nonetheless， good read with a lot of empirical evidence provided as credible sources。

Adham Gasser ，

A very good read on how to review financial statements and read what’s behind the numbers。 The author gives plenty of examples clearly showing traps and minefields in management letters， EPS results， and balance sheet representation。 Concludes that the individual investor can beat Wallstreet large investors by investing time in analyzing financial statements and evaluating fundamentals。 Quality of books and quality of earnings matter on the long term。

Anoosh ，

You will never look at accounting and financial disclosures the same again。

Michael Lim ，

Adequate handbook for novice investors looking to learn how to inspect financial statements

Zhou Fang ，

This book is an interesting relic from 1987， and has a lot of useful concepts and tips。 The main idea of this book is to do your own homework， read the primary documents， and look carefully at the financial statements。 Focusing on a single number like EPS is likely to obscure many things going on under the surface。 All of these principles are useful for any investor。 However， the book suffers from a few problems: 1） It's a fairly dry read and much of the book involves writing out calculations。 2 This book is an interesting relic from 1987， and has a lot of useful concepts and tips。 The main idea of this book is to do your own homework， read the primary documents， and look carefully at the financial statements。 Focusing on a single number like EPS is likely to obscure many things going on under the surface。 All of these principles are useful for any investor。 However， the book suffers from a few problems: 1） It's a fairly dry read and much of the book involves writing out calculations。 2） The book is too advanced for the novice and too surface-level for the practitioner。 Many of the issues in the book have been rectified by standardized reporting of the cash flow statement， and investor focus on operating earnings/free cash flow。 Notably， this is likely because Thorton L。 O'glove's ideas have been very influential。 But the adjusted earnings that many companies report today suffer from the opposite problem: companies try to paint a picture of what "normalized adjusted earnings" are when there really is no such thing for businesses who will inevitably face hiccups from time to time。 3） To the extent that some of the concepts are helpful， they're diminished by the author's focus on short-term year-over-year comparisons vs。 "Street expectations。" The book would benefit from some overall contextualization of the goal: to find how much free cash the business can actually generate。A few of the key concepts in the book:1。 Don't trust Wall Street analysts， and don't trust your auditor。 Both have conflicting incentives （street analysts want to be liked by management， auditors get paid by the Company who they audit who also presents cross-selling business opportunities）。 Ultimately you have to look at and interpret financial statements for yourself。2。 It can be useful to compare the management tone in annual shareholder letters against what the 10-K SEC disclosures actually say。 If management is excessively positive while the financials and SEC disclosures paint a different picture， you have a problem。 Differential disclosure is also a sign of trouble， where management says one thing in the shareholder letter but discloses another in the 10-K。3。 Compare non-operating/non-recurring items from year to year and adjust accordingly so that you can get a more clear picture of the operating results of the business4。 Compare cost differences year to year to see if there are one-time costs in one year that are not in another （making the comparison easier）。 Also， think about cost differences such as increased advertising spending that may depress EPS in the short term but increase EPS in the long-term as dollars increase/spending decreases。5。 Watch A/R and Inventories。 This is the most important part of the book。 If A/R or inventories are rising faster than sales， this can be problematic。 Inventory builds of finished products are especially troublesome as they signal lack of demand。 This is especially problematic in businesses where inventory becomes obsolete quickly， like high tech and seasonal/fashion businesses。 Inventory builds of raw materials are the opposite and likely reflect increasing production to meet demand。 Decreases in inventories with increases in A/R might reflect the "hard sell，" or channel stuffing。6。 Be wary of accounting changes as they can benefit EPS for years to come。 For example， if useful life is increased， depreciation will be decreased for multiple years。 。。。more

Paulo Cardoso ，

Bill Ackman recommends this book as a batch of books to reach if you plan to start investing。 It explain the multiples ways that financial statements show potential traps in future growth of companies and cases where growth will happen。 From tax accounting to dividends there about everything here。Requires user to know some financial concepts for a better understanding。

Kiril ，

Informative but very dry reading

Alexander Han ，

Would have been a fantastic book back in the day （1980s）， but a lot of the concepts are outdated now， putting too much emphasis on PE ratios

Maciej Foremski ，

A difficult book， but worth reading。 Especially for short-term investors。

Shlomo Bergmann ，

The simplicity on how he provides ideas and examples is really amazing。 Another book that I will need to review to reap its true ideas and rewards。

Sonny ，

Great

Alessandro Orlandi ，

Interesting insights on what to look to。 Nothing major。 A little bit difficult to read though。

InvestingByTheBooks。com ，

Recently， there was an article about Chinese IPOs in a Shanghai newspaper。 The writer spoke to Yan Ding， head of Ceibs Research Center in Shanghai about the merits of investing in the avalanche of IPOs coming the market’s way this year。 “If somebody asks me whether to invest in an IPO， my answer is ‘Yes’！ If they should read the prospectus？ ‘No’！ If they should borrow money？ ‘Yes’！” Feeling somewhat dizzy and rudderless， now seemed like a particularly good point in time to re-read Thornton O’glo Recently， there was an article about Chinese IPOs in a Shanghai newspaper。 The writer spoke to Yan Ding， head of Ceibs Research Center in Shanghai about the merits of investing in the avalanche of IPOs coming the market’s way this year。 “If somebody asks me whether to invest in an IPO， my answer is ‘Yes’！ If they should read the prospectus？ ‘No’！ If they should borrow money？ ‘Yes’！” Feeling somewhat dizzy and rudderless， now seemed like a particularly good point in time to re-read Thornton O’glove’s classic Quality of Earnings， built on his ground- breaking monthly report with the same name first published in 1971。 The report was conceived during the author’s early days working as a stock- broker in the 1960s， during which time an “issue craze” swept through the market， rendering prospectus-reading irrelevant。 Considering today’s +40 percent opening-day rigged China IPOs， this reviewer for one hears alarm-bells ringing。 Hence， entrée of the seminal work on how diligent reading of corporate accounting does matter over time。Quality of Earnings first and foremost deals with market inefficiencies via secrets hidden in （almost） plain sight。 Accounting is said to be the language of business and some companies tell more lies than others。 But who is the chicken and where is the egg？ The companies？ Investors？ Auditors？ Clients of investors？ Society？ Chapter 7， dealing with the differences between shareholder reporting and tax reporting is a case in point。 But then of course it all circles back to the meta-debate of whether any of this matters， i。e。 will it impact stock prices during the fund manager’s tenure？ Hence， the derogatory naming of these matters as “academic”。 Wouldn’t the more appropriate designation be as part of the time-arbitrage playbook？One of the most important questions upon re- reading the book is the issue of aging。 Quality of Earnings is likely a cornerstone in most investors’ bookshelves， albeit somewhat dusty。 But this 1987- book can certainly be read with your 2014 glasses on。 But obviously， some aspects of breaking new ground are lost 27 years later。 Howard Schilit’s Financial Shenanigans and Financial Fine Print by Michelle Leder are more contemporary examples of successor books。 The common denominator is the passion of teaching the reader the importance of forensic study of the accounting。 As they say， offense wins games but defense wins championships。 Doing tedious， time-consuming， mostly dead-end forensic accounting work is tough。 And it won’t make you the next-play hero。 But over time plain ol’ number crunching is a requirement to avoid permanent losses of capital。 And the reasoning and case studies in this book will help you on that path。The book is organized alongside order-of- complexity， common-sensical first。 I found the early chapters “Don ́t Trust Your Analyst” and “Don’t Trust Your Auditor” slightly clichéd and over- simplified。 Despite the overflow of events in this direction since the book’s publishing， has anything really changed？ Do portfolio managers read more 10Ks and proxy statements now， skipping sell-side reports？ Not likely。 As the book progresses through the common snake pits in the P&L – non- recurring income， tax-reporting， working capital， debt， accounting changes etc。 - complexity is turned-up a notch。 The main drawback is the lack of actuality aspect in the case studies。 They are certainly instructive still， but it does require a more dedicated reader。 Overall， the book certainly fits in the mold of literature whose modus operandi centers on the “give a man a fish and you feed him for a day， teach him how to fish and he’ll feed himself for life”。 The irony of course is that the Quality of Earnings® report， Footnoted® et al， live off of unwilling fishers。“Because the documents were lengthy， very few [people] would take time out to read them。 Accordingly， I concluded that one could obtain some edge on the market by diligently reading a prospectus from cover to cover”。 I believe this to be true today as well， even though Mr。 Ding and his friend Mr。 Market might burst out laughing。 。。。more

Utkarsh ，

Nice overview， someone should update it with current or recent scandals like Enron to help newer reader understand the nuances of financial reporting

Max Lapin ，

Truly amazing classical book on accounting gimmicks。 You won’t believe but it is thrilling and flows as a good detective book。 Thumbs up。

Nick ，

Very dry， but practical and eye opening

Joel Gray ，

THERE ARE NUMEROUS EXAMPLES OF HOW CONSIDERABLE INCREASES IN INVENTORY AND/OR ACCOUNTS RECEIVABLE CAN FORECAST DOWNWARD EARNINGS AND SURPRISES。 THIS IS ESPECIALLY TRUE IN THOSE INDUSTRIES SUBJECT TO RAPID CHANGES IN PRODUCTS AND TASTE。Problems should be dissected， not hidden or ignored。 A frank discussion of problems， along with thoughts of proper solutions， is the mark of a management which can be trusted。Accounts receivable can indicate the granting of more liberal credit terms and/or difficul THERE ARE NUMEROUS EXAMPLES OF HOW CONSIDERABLE INCREASES IN INVENTORY AND/OR ACCOUNTS RECEIVABLE CAN FORECAST DOWNWARD EARNINGS AND SURPRISES。 THIS IS ESPECIALLY TRUE IN THOSE INDUSTRIES SUBJECT TO RAPID CHANGES IN PRODUCTS AND TASTE。Problems should be dissected， not hidden or ignored。 A frank discussion of problems， along with thoughts of proper solutions， is the mark of a management which can be trusted。Accounts receivable can indicate the granting of more liberal credit terms and/or difficulty in obtaining payment from customers。A company may be merely shifting inventory from the corporate level to its customers because of a hard sell sales campaign or costly incentives。 This type of sales may constitute borrowing from the future。An excess of inventory is a good indicator of future slowdown in production。 An increase is raw materials usually means business is speeding up。When a company becomes locked into the ritual of annual dividend increases the result could be detrimental to the company's operating performance。 。。。more

Zain Khan ，

GOOD BOOK

Zhong Sheng ，

author slightly over-confident and a few examples are over-interpreted a bit too much to lead to a strong conclusion。 But it is thought provoking and content rich book。

Bùi Hà ，

Behind numbers has stories and this book provides us an important framework to discover those stories。 Though some ideas in the book has become obsolete now， the overall way of thinkings are still relevant and crucial。

Matthias Jørgensen ，

Old but a classic。 A very good introduction to how forensic accounting may be used in practice。 Of course， many examples will either have been changed due to accounting updates or perhaps no longer be relevant for the type of company。 However， the walkthrough of deferred taxes （i。e。 tax vs IS accounting） and the analysis of Accounts Payable and Inventory in tandem is worth the book by itself。 I recommend skipping chapters if boring， but reading the aforementioned chapters quite carefully。

Vipin Pandey ，

A must read。 The will book will change your outlook on the earnings reported by co。s。 You will be able to translate earnings into stock value and also avoid co。s that dress-up their Financial Statements。

Michele ，

Exhausting but well worth your time。

Vikas Kukreja ，

It's a hidden treasure， written long back。 Few people might have read it， but the information or knowledge it provides to avoid pitfalls are priceless。 This book is content rich and any fundamental investor will benefit tremendously from it。 It's a hidden treasure， written long back。 Few people might have read it， but the information or knowledge it provides to avoid pitfalls are priceless。 This book is content rich and any fundamental investor will benefit tremendously from it。 。。。more

Clement Ting ，

The language used in this book is very layman but the idea is great！ I like the way the author brings its reader through baby steps in explaining something difficult in an easy to understand manner。 With all the financial engineering in making the figures look pretty， this book has shown me several techniques in unmasking these figures to draw out the （close to） true earnings of a given company。 I would definitely recommend this to anyone that is keen to drill a company's profit earnings and als The language used in this book is very layman but the idea is great！ I like the way the author brings its reader through baby steps in explaining something difficult in an easy to understand manner。 With all the financial engineering in making the figures look pretty， this book has shown me several techniques in unmasking these figures to draw out the （close to） true earnings of a given company。 I would definitely recommend this to anyone that is keen to drill a company's profit earnings and also give it a 5 star but the book is rather old and some of the ideas here are just no longer applicable （not in my country at least）。 It goes without saying but the book is more catered towards the US market so unless you have a time machine that can send you back to the 80s， and you are in a market with very similar accounting and tax standards as the US， you will not be able to utilise 100% of this book。 Then again， it is a very simple book so it probably would not take up too much of your time should you choose to read it。 。。。more

Gabriel Pinkus ，

Very informative analysis of short-term balance sheet trends and other financial statement analysis。。。 Thorton spent his time figuring out when quarterly earnings would miss or exceed targets。。。 Short-term thinking， but he was good at it。 Pare it with long-term analysis of the intrinsic value of a business and you have become a better security analyst。

Jwack ，

Excellent book！ Every chapter focuses on a single topic and gives several examples to explain the concept presented。 I learnt a lot about what to focus on while reading an annual report。 Investing is a negative art as much as it is an art， hence it is very valuable to know hot to avoid potential losers。 This book gives you that。I would like to read it again after a while to refresh my memory about various ideas presented herein。

Manish Patel ，

Each chapter is well written and provides valuable insight into reading the Annual reports。

Reference

google book https://www.google.com/search?tbm=bks&q=Quality of Earnings

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