© D.L. Crumbley
Red Flags with Horizontal Analysis
When deferred revenues (on the balance sheet) rise sharply, a company may be having trouble delivering its products as promised (Cendant Corp.).
If either accounts receivable or inventory is rising faster than revenue, the company may not be selling its goods as fast as needed or may be having trouble collecting money from customers. For example, in 1997 Sunbeam’s revenue grew less than 1% but accounts receivable jumped 23 percent and inventory grew by 40 percent. Six months later in 1998 the company shocked investors by reporting a $43 million loss.
If cash from operations is increasing or decreasing at a different rate than net income, the company may be being manipulated.
Falling reserves for bad debts in relation to account receivables falsely boosts income (cookie jar accounting).