We penalise companies with large and/or rising other short term liabilities relative to industry peers. We would be concerned about any material build-up of non-traditional short term liabilities, such as hedging items. Other short term liabilities are a fairly meaningful balance sheet item, typically equating to 7-15% of sales, which is similar in size to receivables and inventories. Two sectors have especially large exposure in excess of 20% of sales, real estate developers and software companies, as shown in Figure 47. For these sectors, the short term liabilities normally relate to customer deposits or deferred revenue (amounts received in advance of earnings it). Given that some sectors clearly have greater exposure to other short term liabilities, we believe it more appropriate to use industry peers as a comparison rather than country peers.
As such, our accounting screen is set to trigger a red flag when other short 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 short term liabilities/sales exceeds the 80th percentile relative to the change experienced by GICS industry peers between 2010 and 2015.