Easy Lessons to Help You Become a Financial Detective


Written by

Jae Jun

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I’m a big fundamentals and earnings quality guy.

I love to digging into numbers, checking ratios, comparing with past performance and the works.

Pretty much why I’m always looking for ways to add to and improve the stock valuation spreadsheets based on new found knowledge.

And when it comes to stocks, more often than not, a lot of what management says does not match what the financials are telling you.

For every story, there are two sides and the part that investors regularly forget to listen to is the financials side of the story. There isn’t much help out there in terms of you helping you become a better financial detective and I’ve made mistakes where I trusted management’s word too much and ignored what the numbers were saying.

Margins were dwindling, moat was eroding, but management laid out their plan to repurchase shares because their company was undervalued and that their main focus was to increase shareholder value.

Well, the ending was not a happy one and I had to cut ties.

You and I have had our fair share of losses and I know that I don’t want to go through that again.

Becoming a Better Financial Detective

One way to improve my skills as an investor was to learn how companies massaged their numbers to beat earnings or give the illusion false growth by relying on the financials. I got the lesson through a book called Quality of Earnings. You can read my review of Quality of Earnings.

Quality of Earnings was an eye opener for me because it was filled with excellent practical and actionable steps when analyzing stocks. I found tips to quickly detect changes in the footnotes as well as getting a very good understanding of how some simple ratios can be used to determine the quality of earnings.

But Quality of Earnings was written quite a while back and the examples are quite old so it can be difficult to relate.

However, there is a new book that provides as much goodness as Quality of Earnings.

What’s Behind the Numbers?

What’s Behind the Numbers? is just a fantastic book if you want to take your financial analysis and understanding to the next level.

The book focuses on determining earnings quality and what to look for in a company that could be manipulating numbers to please Wall Street.

The examples are all fresh and new and if you have been investing for about 4 years, you will probably be familiar with each incident. It makes it easier to understand and relate to what happened to why it happened. You’ll have plenty of “oh I see” moments as you read this book.

If you have already read Quality of Earnings by O’Glove, What’s Behind the Numbers? goes through many of the same things. The fact that it covers many of the same ideas is great because it is consistent with other books, but this book also improves on it by making it more practical and providing tables and simple calculations so that you can easily follow along.

If you want to tools to be ahead of the herd and learn the skills needed to detect good or bad trends in the company to be able to act upon, I highly recommend you to read this book.

  • Louis

    The book doesn’t come out until October 17th.

    In the meantime, I’ll be reading another book you recommended –

    Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, Third Edition. This book seems to be substantially focused on the various gimmicks and fraud commonly found in financial reports.

  • Louis

    I was told by Amazon this morning the hardcover book doesn’t come out till Oct 17th.

  • Looks like the book is only available on kindle at the moment. Hardcover will be released on 10/12. I have the ebook btw.

  • Carl

    Jae
    I’m reading this book as well and have couple questions. On Chapter 5, table 5.15, what is sequential change and how does the author calculate it ? Also, I have no idea how the author calculates the year-to-year change as well.

  • @ Carl,
    Sequential change just means the change from the previous period. This could be annual change, or quarterly change or monthly change.

    The way to calculate this is easy.
    (Year2 – Year1) / Year1

    This will give you the % change

  • N

    Hello Jae,

    In page 43 regarding Doubtful Accounts

    Why does the author use:

    Allowance for Doubtful Accounts / (Allowance for Doubtful accounts + Net AR)

    Cant we just divide the Doubtful Accounts by the AR to see if it is rising or falling?

    Thanks

  • Carl

    Thanks Jae. One more thing, any chance that you may incorporate some of the methods in the book for your spreadsheet ?

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