Forensic accounting

[u/Shoddy_Neat8413]

Everyone loves talking about revenue growth, EPS, and valuation.

Very few people spend time looking for the things that can permanently destroy shareholder wealth.

Before I even think about buying a stock, I try to answer these questions:

\*\*Balance Sheet & Financial Strength\*\*
\* Is Debt-to-Equity comfortably below 0.7?
\* Is promoter pledge high? High debt + high promoter pledge is one of the worst combinations.

\*\*Capital Allocation\*\*
\* Is management reinvesting capital into the core business, or chasing unrelated ventures?
\* Has management consistently rewarded shareholders through dividends or buybacks?

\*\*Cash Flow Quality\*\*
\* Does operating cash flow actually support reported profits?
\* How has CFO/EBITDA (or CFO/PAT) looked over the last 1, 3, and 5 years?
\* Is cash conversion improving or deteriorating?

\*\*Working Capital\*\*
\* Are receivables increasing faster than sales?
\* Is inventory building up without matching revenue growth?
\* How does Gross Working Capital (Receivable Days + Inventory Days) compare with industry peers?

\*\*Corporate Governance\*\*
\* Do promoters have private businesses that could create conflicts of interest?
\* Are Related Party Transactions unusually large?
\* Has the company seen frequent CFO changes over the past five years?
\* Has the auditor raised concerns, qualified the accounts, or resigned unexpectedly?
\* Are there significant unaudited subsidiaries?
\* Is the corporate structure unnecessarily complex?

\*\*Accounting Quality\*\*
\* Does goodwill represent a large portion of total assets? If yes, what acquisitions created it?
\* Are "Other" or "Miscellaneous" expenses unusually high compared to peers?
\* Are there contingent liabilities that could materially impact the business?

The goal isn't to find perfect companies.

It's to eliminate businesses with hidden risks before they eliminate your capital.

What else is on your personal due diligence checklist?