Our Debt Window Dressing model aims to highlight companies which are removing debt just before reporting dates with the aim of flattering solvency ratios. It is triggered by a high effective interest rate and an unusually high level of debt repayment. Around 5% of companies trigger this model more than once in the last three years. The next step is to check whether the flag is a false alert and to quantify materiality. Analysis should focus on the company’s disclosed cost of debt versus the effective cost (which is based on the average year-end debt). Should the latter exceed the former by a material margin, it could indicate that debt is being temporarily removed at reporting dates. This is often financed by the sale of receivables. It is worth looking for supporting evidence which would provide further confirmation of window-dressing.

lock03 Read More