Forensics and the art of triangulation

I will be following this thread with great interest. I lost money in my initial days as an investor because I could not read the danger signals. Some examples Aftek Infosys (Cash on Balance Sheet > Market cap). The cash suddenly vaporized when they announced the acquisition of a privately held company from one of the promoters for an amount almost equal to the cash on books. Another one, where I luckily did not lose money was Geodesic, which claimed to have nearly Rs.1,200cr invested in obscure securities outside India, but failed to pay its lenders even a fraction of that money when payment became due

I have not done the scuttlebutt to the extent of some of the boarders on the Kitex thread, but the questions raised about the Rs.200 crores, as well as the presence of another privately held group company in the same line of business gives me an uncomfortable sense of deja vu.

Disclosure: Not invested in Kitex, and my views are negatively biased due to previous bad experiences.


this thread is just based on my inferences - it cannot help detect fraud with 100 % accuracy. Infact, quite the converse, you may let go of lots of opportunities because of the grey areas.

Pls do not get kitex into this thread - I have no axe to grind here. I just view the world differently from everyone else here - I am an outside in investor - I prefer to make a mental model of how numbers should look and then see where I can see big gaps.

will post my starter thoughts on triangulating cash later today.


@varadharajanr Great post.

Good Initiative Varadha

Will be tracking this thread with interest.

And I hope this will equally attract those trained in forensic audit to provide reality checks/guidance.


Agree with donald on this thread.

about the right time to start a thread like this with a lot of companies running amok on news/rumours/fancies/recommendations/forum discussions :smile:

And I love the way you have started off with a big bang. Keep going.



Very good initiative. I would also suggest if you can link thread on Corporate Fraud which was

We shall collectively try to work on new names which are proposed for investment. Hope to post on this thread frequently.

We also have interesting discussion in one more company which price have appreciated a lot but still did not give comfort to many members in valuepickr forum.

So we have good stuff from valuepickr forum itself. Other members may also suggest link which serve this thread.

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Thanks for the encouraging words. So, here it goes as far cash a few common sense items on cash are concerned

cash and cash equivalents

Remember that most times these go hand in hand with current/non current investments too. Please read all three of them, pause for a while and take a deep breath and check if it all makes sense if you were a business owner.

Most companies are expected to give schedules for all three

cash and cash equivalents

typically should have

  • number of bank accounts
  • domicility (in case of truly multi national companies like infosys)
  • account numbers, if they are not too many in number -

Not giving any details/schedule for cash and cash equivalents is an amber flag and is worth digging. For one to get a flavour, please look at infosys, TCS

How to triangulate this

This is the key - every single item in PL and BS talks to another in the real world. If someone pinched you in your hand, your head flinches. Similarly so, cash and cash equivalents plus currrent investments (often used interchangeably in companies that have cash) ought to result in

  • other income (look at income yield - a Rs. 200 Cr. cash in FD/liquid funds/government bonds ought to yield anywhere from 5 % - 9 % annually on an average (remember, its average - not the end of the year figure - so a good approximation would be the average of opening and closing balance). For eg., in HTMT, even though the company claims they have cash, there is little to show in terms of " other income". Do remember that Indian rates are amongst the highest in the world and for any exporter who has a huge cost base in India, it makes sense to convert the forex into INR. In any case RBI mandates for a month period before which all forex has to be converted in EEFC (exchange earners foreign currency) account into INR. Again, it’s only INR that helps the Indian economy by percolating down as SLR, CRR, etc. through the banking system. So most branch managers are incentivized to ensure an early conversion because of

  • fee (forex conversion fee)

  • access to CASA plus FD/RD funds

  • unfunded liabilities in something very basic eg., PF, ESI, gratuity. If a company has adequate cash, why would you leave these unfunded.

  • sundry pending litigations - a company that has Rs. 200 Cr. cash will not leave a Rs. 1 lakh IT claim/excise claim unfunded. Again, this is subject to exceptions are a few MNC’s are subject to tax terrorism. But typically sundry claims like employee suing for Rs. 5-10 lakhs and claims outstanding for 5 years are not a healthy indication. For eg., there is a company that claims a few hundred crores in cash that has an unfunded gratuity liability of Rs. 4-5 Cr. - strange, right ?

Current investments /non current investments

  • here again, look for schedules that are as detailed as possible. There is no harm if the company invests into FD,RD, liquid mutual funds etc - but what one should be wary are investments into private company debentures, unlisted unknown companies etc. These are precious use of company’s cash and in india it’s not uncommon to see money invested in to relatives companies. Again, the only way to assess this is the materiality of the amount vis-a-vis the total amount. For eg., a company like SETCO, which I held for a while and sold, promoters were indiscriminately lending money into an initiative to build sports stadiums and sports clinics because the young scion wanted to help the community - great thought, but not with my money dearie, and not certainly when the core business itself is struggling.

Again, if you look at trend of other income, there has to be some profit boking/accrued income from the investments at frequent intervals. For eg., a Rs. 300 Cr. cash invested into various companies and zero dividend/profits for 3-4 years is something to think about.

More coming next week end. Improvisations welcome - writing this by itself helped clarify a few things and I am sure inputs form VP-ers will refine this for the betterment of everyone.


@varadharajan ranganathan , I am new to VP forum. I am really amazed by the content that is being shared and discussed over here. This thread will surely take that to the next level. I am already glued to this forum and have already bookmarked this thread. Happy sharing.

@varadharajan, thankyou for starting this thread,since I am new here would learn a lot reading.

Am sure this thread will take our understanding to another level. All the power to you and all ears.
Keen follower.

Hi guys,

great thread. One caveat while looking at balance sheet. Remember its a point in time representation. so take both good and bad with pinch of salt. look at cash flows and underlying business to triangulate. Let me give an example, and this happens typically in banks.

At quarter end or on year end they will book large loans and then disburse them into current account of clients. The current accounts are kept on no debit status for 1 day. So on year end u have both assets and CASA :smile:

but this can be challenged if u look at overall economy, cost of funds of banks etc


Hi all,

speaking from experience, here are some other red flags

  1. Continuous CAPEX. Any business that needs to keep investing to grow revenue is a self defeating cycle on the return of capital front. Its also a easy way to channel money out of the system.
  2. Low promoter salary. Do not for even a minute think the promoter is some magnanimous fellow who is working his butt off for you at a pittance. If the salary is low, means he is earning elsewhere
  3. Promoter owning another entity in a similar line of business. Do I need to elaborate this ?
  4. Increasing promoter pledge. If I was running a company in which I own a fraction, why would I pledge my shares for the benefit of the company. Also, ask the question how will the pledge be unwound ? Unless the promoter sells some of his free shares in the open market, there is no way to clear the pledged shares from the encumberance.
  5. Low dividend to EPS ratio. If the cash is real, most of it should get paid out to shareholders. Reinvesting in growth , etc is a good smokescreen promoters use. See through it.
  6. Too many acquisitions/equity dilutions. these tend to muddle the waters and prevent analysts/ investors to compare performance on a straight line basis. some promoters acquire companies only to confuse people tracking it.
  7. Stock splits. No benefit to anyone other than to confuse the average investor on the cheapness of the stock. The situation is now so bad that you hardly get any meaningful EPS from any company…most are like 1.12, 0.98 , etc for the quarter. Any company with any meaningful EPS is now priced over a 1000 bucks. think about it.

Wow Varadha, You Finally started what always was kept undiscussed. Well, over years, a lot of us certainly would have developed few so called red flags. Will be glad to contribute to this thread :smile:

Good initiative. Some of the case studies I would like to recommend are:

a) Tianhe Chemicals - All documents are available on Anonymous Analytics website. - A simple thing shown is that the entire market size for a material called Anti-Mar was not as big as the size of sales the company was claiming.

b) Current work on Herbalife by Bill Ackman.


Superb thread Vardha. It would be gold mine for many investors like me to learn how to identify red flags thought multiples perspectives.
Wanna share one simple metric many of us know: Add Operating cash flows for a decade and compare with corresponding PAT for decade. If PAT is substantially less than Cash flows, either company is booking profits aggressively or its cooking books. Either way its a red flag and can be checked if working capital is funded by another source of funds (eg: debt, FCCB, share dilution etc) since working capital is getting stretched by this difference in OPCF and PAT.


Some stocks are born great (e.g. Reliance Power)
Some achieve greatness (e.g. Eicher Motors)
Some have greatness thrust upon them (eCommerce (?))

Value investing i.e. the art of separating wheat from the chaff is picking the ones that fall in category 2 and shorting the other two categories (at least avoiding them since shorting is not easy in India). This of course requires going against what the world feels is ‘great’. It’s incredibly hard and requires guts, for which I commend you @varadharajanr Keep it up and good luck

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I agree, this one is very helpful tool to check the economic profits of the company. But I feel instead of just PAT, one should look at (PAT + Dep) and than compare it with Operating cash flow. If we just use PAT, it will always be lower than Operating Cash flow.

Good point jignesh, but I believe PAT + Dep will be too strict a criteria, especially where dep is not too much.
Also, remember we are identifying red flags, so if even PAT is more than Operating cash flows, certainly there is some issue to dig in more. There are many cos whr PAT is higher than OCFs. Hope it helps

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These are good points. thanks everyone. However, I am very keen on detailing these - I just do not want to brush anything with a broad brush - for eg., high receivables is bad, low CFO/EBITDA is bad etc. unless we can overlay it with an understanding of the business, where cash is used and how it is earned.

I am looking for specific examples, case studies rather than stereotypes as I want to minimize both alpha (not capturing an issue) and beta errors (assuming an issue exists whereas in reality it does not).

For eg., in opto circuits even though acquisition led sales growth was high, CFO’s were consistently negative and receivables were going through the roof, resulting in a cash crunch that ultimately turned debt repayments and investments into a tight squeeze.

Triangulation is about using at least 3-4 data points together to make a judgement to minimize systemic error - not just stereotyping using one single data point.


Hi Vardha,
Thanks for feedbacks and nice to learn from live/old examples than general rules.
However, we need to be very much aware that every company that does something fishy does it in its own in-genuine way. Hence, same game doesn’t get played out in every fraud, but major learning remains same. So, like in opto also, what comes out clear is that receivables were getting high with negative cash flows along & multiple acquisitions (Almost sure shot recipe for disaster). So, with every examples and study we do, its good to highlight broad learnings and thumb rules as takeaways for everyone.
Also, it would be great to test our learning and theory on companies in current situations and discuss which cos can have bleak future and will turn out to be disasters using our learning.
Hope it helps.

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