Reading Accounting Quality and EPV Case Studies


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Written by

Jae Jun

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It’s been a while since I included some good reads.

The types of articles I look for are not the latest. Like antiques, sometimes the best things come from the past.

This week I bring you a round of articles focusing on accounting and earnings quality as well as a deep dive into Earnings Power Value.

Financial Shenanigans: Detecting Accounting Gimmicks that Destroy Investments

During the past few years, I have been shocked and disappointed by the way corporations have increased the use of manipulative accounting gimmicks when their management presents information to investors. Such behavior occurs in both reputable and disreputable companies. In fact,many of the companies that I cite in my examples are highly regarded companies, so I am not pointing fingers at any particular type of company.

Is There Any Value In Stella Jones?

The value analysis I will conduct today is based on the methodology outlined in the book Value Investing: From Graham to Buffett and Beyond. If you are interested in finding out more about value investing, this is the perfect guide. It explains the philosophical approach to value investing, and provides enough information for you to build your own value analysis model in a stock analysis spreadsheet.

Berkshire Hathaway and GEICO:an M&A case study

This case shows the potential for utilizing the modern Graham and Dodd (G&D) valuation approach in a corporate setting to improve the odds of successful M&A. G&D valuation differs from other methodologies in that it addresses valuation through a unique construct,the value continuum. This continuum not only focuses on assets and earnings, but also on competitive advantage and growth. By evaluating these elements within an overall framework the G&D method frequently produces more insightful valuations than other methods. Furthermore, those valuations can be proactively utilized to effectively guide due diligence.

The Power of Earnings

One method we’ve found to be very useful in determining the value of a company’s current cash flow is earnings power value, or EPV. In contrast to valuation methods that require making uncertain growth projections, EPV is based only on a company’s actual (trailing 12 months) cash flow. We can actually ignore growth estimates when using this tool, so this makes it a great starting point for analyzing a stock.

Where You’ll Find the Next Killer Short

These are companies with questionable management teams, eroding competitive advantages (assuming they had them to begin with), and business models so bad they’d make a 5-year-old’s lemonade stand look like genius. Execs at these companies desperately try to hit their numbers every quarter and sometimes, when they just can’t make ’em … well, they might just be inclined to fudge ’em. The good news is that you have the power to spot these potential snakes in the grass — you just need to know what to look for.

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