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Sleight of hand

Thanks to accrual accounting, many companies show profits on the revenues they are yet to receive

Sleight of hand

Accrual accounting is an interesting concept. It allows a company to recognise its revenues in the same period during which it sells its goods or services, irrespective of the fact whether it receives the cash or not. The amount yet to be received is entered under the head 'debtors' on the balance sheet.

To some extent, credit sales are good for a company since it can attract customers by selling them goods today and providing them the flexibility to pay back after some time. But a company's rising credit sales are a red flag, since they mean that the company is not receiving cash for its goods or services. Worse, it may also mean that the company is selling on credit just to show a jump in its sales and profitability. Hence, it's important to dig deeper into a company's reported numbers and not take them at their face value.

Here is a list of companies with high debtors. The sales of these companies are growing at a rate of 5 per cent or more. Their debtors as a percentage of revenue are greater than 30 per cent currently and are rising consistently for the previous three years.