Seven companies with accounting red flags
The retail and leisure sectors are full of companies with accounting red flags, according to investment bank Liberum which has screened for future business risks by looking at profit smoothing, working capital, cash uses and governance issues.
It declares Domino’s Pizza (DOM) to have the biggest red flag when it comes to looking at one-off items in financial results, often called exceptional items.
Liberum adds that the pizza seller’s long-term receivables – amounts owed to the business – have increased by 27% over the last three years and questions whether this is sustainable.
It says Majestic Wine (WINE:AIM) is holding inventory for longer but is paying creditors faster, so operations are more capital intensive.
Liberum calls AO World (AO.) ‘the worst offender’ when it comes to working capital issues, noting that the retailer is taking a lot longer to get paid by suppliers compared to two years ago.
Also ranking highly in terms of material levels of one-off charges are Superdry (SDRY), Dixons Carphone (DC.) and deal-hungry DFS Furniture (DFS), with Liberum fretting that the decline in the latter’s core business ‘may be being masked by the group’s acquisitions’.
In terms of Boohoo (BOO:AIM) it says there is potentially a large cash outflow relating to the option management has on buying out the remaining stake in Pretty Little Thing.