Stock Profits: Getting to the Core—New Fundamentals for a New Age

In a normal situation, where sales growth is legitimate,

you would expect working capital trends to remain un-

changed, so tests such as current ratio or the acid test will

be consistent. When sales are prebooked, you will observe

a decline in cash flow accompanied by suspicious changes

in accounts receivable.

b. Increases in debt capitalization. The decline in cash flow

can be masked, however, by accumulating cash through

long-term borrowing. This is why we strongly recommend

tracking trends in debt capitalization as part of the “core

fundamental” program. Even without the outright ma-

nipulation of sales trends, a weakened trend can be

masked by a corporation ...