Key Metrics Shenanigans: Part 4.

Part 4 introduces readers to a group of shenanigans that stretches management’s creativity in deception to the limit. 

This section of the book shows Key Metrics (KM) Shenanigans used to distort an investor’s understanding of the economic performance and health of that company. The accompanying boxes summarize exactly how it is done and how investors can spot these devices. 

Warning Signs: Showcasing Misleading Metrics That Overstate Performance (KM Shenanigan No. 1) 

• Changing the definition of a key metric 
• Highlighting a misleading metric as a surrogate for revenue 
• Unusual definition of organic growth
• Divergence in trend between same-store sales and revenue per store 
• Inconsistencies between the earnings release and the 10-Q 
• Highlighting a misleading metric as a surrogate for earnings 
• Pretending that recurring charges are nonrecurring in nature 
• Pretending that one-time gains are recurring in nature 
• Highlighting a misleading metric as a surrogate for cash flow 
• Headlining a misleading metric on the earnings release

Warning Signs: Distorting Balance Sheet Metrics to Avoid Showing Deterioration (KM Shenanigan No. 2) 

• Distorting accounts receivable metrics to hide revenue problems 
• Failing to prominently disclose the sale of accounts receivable 
• Converting accounts receivable into notes 
• Increases in receivables other than accounts receivable 
• A huge decline in DSO following several quarters of growing receivables 
• Inappropriate or changing methods of calculating DSO 
• Distorting inventory metrics to hide profitability problems 
• Moving inventory to another part of the Balance Sheet 
• Distorting financial asset metrics to hide impairment problems 
• Stopping the reporting of certain key metrics 
• Distorting debt metrics to hide liquidity problems