Hidden Time Bombs that investors should learn to look for

Investing in businesses in the stock market is riskier business than you realise. The American standard accounting practices hide a multitude of sins from the unsavy investor. Companies like Enron, Countrywide Financial and GMAC can be huge titans one day with seemingly positive and healthy balance sheets and gone the next in a sea of debt.

A business may have a healthy dose of working capital and good profitability however it can be very short on money, constantly looking for cash and never having enough.... This can create a long term problem that you will do well to spot today.

Accounts Receivable can severely inhibit a businesses cash flow
Carrying and servicing too much debt can cause cash to dry up

Retained Earnings are a beautiful method of balancing the books, however if the company does not have the actual money the question lies as to where it is retained?

Depreciation is a great way to avoid and mitigate some tax payments, however how does one buy new equipment when the old items have expired (hence the title depreciating assets). Is there a separate account funded by this depreciation write off?

Does the company significantly reinvest in capital improvements? How are these allocated and what is the usefulness of these investments in earning profits for their investors? Did that fancy new office with 5,000sq ft managers suites really increase productivity at all ....... to the same token did the sale and leaseback of the company head office which gave us a great deal of cash this year reduce the overall and long term profitability of the company and deceive investors and managers alike to the problems brewing in the future of the business with reduced profitability?

Share buy backs are great, but were they funded with cash or loans, did VC's come and buy the company with its own assets and saddle the company with debt...this allows them to deploy money, but what will the return be and how will it help the company fuel expansion and growth. Will that growth be in core business and profitability or will it be a mistake? (take Ford who spent Billions of its cash surplus buying into repair and maintenance as the future profit center for the company only to sell it for cents on the dollar and crash the companies stock value)

A perfect example would be Microsoft, who should they deploy they buy Yahoo will become an ideal target to short as they will have to absorb phenomenal costs to integrate the two companies and go through several iterations before problems are rectified, they will also see some serious degradation of their balance sheet as the goodwill values of both companies is absorbed.

One of the biggest give aways though is the share dealings of insiders, these acts must all be recorded and become part of the public domain, if you see key figures SEC Form 4 buying or selling heavily then this is a great indication of a buying or selling opportunity. (look at Angelo Mozilo's 925,815 CFC shares in about 1 year) Do not less this one pass you by, you will never get a better indication of a companies future...

Copyright Jonathan Rose 2007 - Creative Commons License





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Positively Profit

America seems to have lost its focus on the most critical element of business - profits - companies now seem to manage for and use ever metric possible but profit.... Turnover, productivity, employee satisfaction, every other buzz word, trend and "business phenomenon" has driven the American business owner from his core purpose. The business of making money.

Alot of this advice about avoiding profit comes from one place in particular, your Accountant who is now in essence works for the IRS (which you may not have realized) and is fined and penalized every time they try to find a creative way for helping minimize your tax burden. Therefore the less you have the easier his job and the lower his risk and the higher his profit margin.

Profit should not be the mistake that drops out the bottom of your P&L, an accounting aberration at the end of the year, it needs to be planned, predetermined, the first line of expense for a company and not the last!!!! When you set up your budget or forecasts for the year, ensuring a healthy profit should be the first thing you do, the remainder of the year should then be spent protecting and defending that number by minimizing expenses.

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Inevitable Evolution

I have been thinking alot recently about the progression, development and ultimate evolution of the Homo Sapien (humans) and it started to occur to me as I develop out Brain Make Over that the ultimate advancement of society may well be slightly different to the course most have predicted.

Many see futures of Robots etc in control (Terminator, i-Robot etc) however i think it may be a little different in reality - and here is why:

Technological advancement is leading us towards smaller and smaller devices that we collaborate using with greater frequency. No one will doubt or be suprised at the suggestion of a hearingaid sized cell phone or glasses that act as computer screens.... these have already been depicted in movies. However the very next stage of development would be the complete integration of such devices subdermally. (like pet tagging)

These integrated bio/neural chips would then directly connect individuals into the World Wide Web (www) etc. We already have examples in self monitoring (telemetry) pacemakers and other such cardiac devices. Such integration would ultimately if followed to its natural and logical conclusion create for a world where humans are to some degree controlled by computers (not in the Matrix fashion) but in a far more real system where dependency led to enhancement of the human organism. Nano Technology and biology would start to merge within the human development process creating a greatly improved human....

AKA evolution


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