Accounting Ratios

Non-Production Assets

We penalise companies with high and/or rising amounts of non-production assets relative to Cost of Goods Sold (COGS). Non-production assets are defined as any assets that are not production assets (net fixed assets and inventory). A build-up in non-production assets can be indicative of Fake Cash Flow Frauds. Companies which are inflating their revenues are unable to pay fake cash flows out as dividends (because it doesn’t exist) and must park it somewhere on their balance sheets. Normally, this builds up as cash, prepayments or some form of investment (wealth management products, etc.).

For manufacturing companies, non-production assets equate to around 40-100% of COGS and increase at around 5% of COGS each year. For non-manufacturing companies, the level is far higher, as shown in the charts...