We penalise companies with large and/or growing other long term liabilities relative to industry peers. We would be concerned about any material build-up in non-traditional long term liabilities, such as hedging items. Other long term liabilities are generally a relatively small balance sheet item, at around 1-5% of sales, as shown in Figure 51. By comparison, inventories and receivables equate to 10-15% of sales. Two sectors have noticeably higher exposure, electric utilities and REITs. For electric utilities, this seems to refer to decommissioning, derivatives & hedging and customer deposits. For REITs, it might refer to deferred taxes which we have failed to pick up on in our scan. We think it more appropriate to compare against industry peers rather than country peers.
Our accounting screen is set to trigger a red flag when other long term liabilities/sales exceeds the 80th percentile relative to GICS industry peers, and/or when there is an abnormally large increase relative to the normal rate of change amongst industry peers over one and three years. This latter red flag is triggered when the increase in other long term liabilities/sales exceeds the 80th percentile relative to the change experienced by GICS industry peers between 2010 and 2015.