Legitimacy of company results


Do we have list of checkpoints to know whether company posting results are not cooking numbers.

One of the point is to check the tax paid should be around 25-30% of earnings.



One other indicator could be any cash dividend paid. However, nothing can stop a determined company from doing the hoopla dance should it want to.

When a company like Apple is under scanner for misleading investors, what to say of lesser companies ?


Apple wasn’t even reporting its U.S. taxes accurately, either, the Senate subcommittee found. Its annual report disclosed it paid much higher U.S. taxes than it actually paid to the IRS.To investors, Apple said it paid $6.9 billion in U.S. taxes in 2011. But it actually only paid the IRS $2.5 billion, according to its tax return.

Some of the things that I have seen over the years:

a) Increase in EPS (Net Profit) with no corresponding increase in operating cash flows. There are a tonne of companies which do this regularly to inflate EPS.

b) Money present with foreign banks/clients/suppliers and unverified by the auditor. The company might just come up one day and say the client has gone bankrupt. Multiple examples here.

c) Amount of tax paid. This is not necessarily an indicator of numbers being cooked up but you need to go a level deep. Some of the sectors like agriculture (Kaveri), Pharmaceuticals R&D (Ajanta had low tax rates mainly because of this) do have tax holidays/rebates.

d) Investment/diversification/Subsidiaries in non core areas which allow for large one time depreciation to prevent tax payments.

e) You need to have a clear understanding of the interest that the company is paying. There have been instances when interest has been capitalized to boost assets and show increased profits.

f) I personally avoid highly flashy promoters.

Some of the gimmicks that I have seen promoters play:

g) In my opinion dividend payment should not be a criteria if you understand the balance sheet well. On the other hand I have found that a lot of these companies who cook up numbers are actually decent dividend payers in short term.

h) Promoters issuing preference shares/bonds regularly to themselves and not buying from the market. There is a chance that the promoter is not paying for shares at all.

As a case study you can take a look at SGJHL. If you go through this company’s ARs you will find all the above (foreign client defaulting, investing in solar energy, avoiding tax payments, increasing operating capital and the gimmicks like regular dividends, increasing capital byallottingshares to the promoters at nearly 30% higher than market price).


I am currently reading AR2013-14 for SUN TV. In CashFlow Statement, i see below entry

Purchase of intangible assets (including advances towards purchase

of intangible assets) (4,106.0) (1,949.5) [2014 and 2013 figures] in millions of Rs.

What is this entry? and its significance. Willing to take input from other investors.




Rajkumar, intangible assets are non-physical assets. Common example is trademarks, patents, copyright, technical know how, etc.

You need to check the AR if Sun TV has purchased such assets and whether they are purchased from related party or not.

Because these are non-physical assets, it is very difficult to find comparative benchmarks to determine whether the cost of such an asset is fair or inflated. The valuation is very subjective, based on future potential of the intangible asset.

Anant Jain: very well articulated. never thought like the pointer e)

thank you


See if the company had made any purchases in the last year (purchase of another company). Incase the payout has been higher than the book value of the purchased company the extra amount will reflect in intangibles.

Thanks everyone for clearing the doubt.

I have not completely gone through the AR and still trying to figure out. I did a quick check on previous ARs and see this item on every year.
2014 2013 2012 2011 2010 2009
Purchase of fixed assets,
capital work in progress
(including capital advances)
20.67 398 312.4 199.1 309.1 460.7
Purchase of intangible assets
and expenditure on intangible assets
under development (including advances towards purchase of intangible assets)
410.6 194.95 399.4 280.55 270.56 221.4

All the above spending are in Crores (Rs.)