How Difficult Was It to Spot Inox Wind's Problem? - Chart Of The Day 14 June 2018 - Equitymaster

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How Difficult Was It to Spot Inox Wind's Problem?
Jun 14, 2018

Talking about Inox Wind again, I believe the reason the auditor resigned is different from what they have mentioned. Look at the chart below.

It tells you a lot about the problems with Inox Wind.

The easiest and most used financial shenanigan is to fudge sales and profits. Companies book fictitious sales and profits. The profit and loss account looks glorified with profits touching sky.

However, these companies cannot fudge cash flows. Because they cannot recover money from the fictitious sales.

Over the period of FY13-16 net profits shot up by 3x, however, the company made operating cash losses which shot up by 3.2x.

Well, we don't believe it was rocket science for investors and auditors to figure this out.

And for investors to avoid the stock of Inox Wind.

The primary duty of an auditor is to verify what the company claims. However, since auditors are paid by the company itself, in many cases, the incentives don't align.

But now, this is all set to change with the new regulator the NFRA..

We believe, incentives need to get re-aligned and auditors need to do their fiduciary duty.

For us, this is like icing on the cake because, while evaluating a company for a Smart Money Secrets recommendation, we try to look at the numbers from an auditor's perspective.

This helps us avoid obvious mistakes like Inox Wind.

And we strongly believe, we can recommend stocks to our Smart Money Secrets subscribers for long-term wealth creation by avoiding these kinds of obvious and stupid mistakes.

Data Source: Ace Equity

This Chart Of The Day was published in The 5 Minute WrapUp - Will You Dump Your Client if You're Busy? Inox Wind's Auditor Just Did...

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