We penalise companies with a high and rising level of provisions relative to sales. Companies with a rising level of provisions might be under-stating profits. These provisions can then be unwound in more challenging periods in order to "manage" reported earnings. Alternatively (and of greater concern), provisions can be established when making adjustments to the assets and liabilities of acquired companies. These initial adjustments do not go through the income statement (unlike the prior method) and so companies have been known to establish large provisions at the time of acquisition which they then unwind in future periods in order to artificially inflate profits. As such, we also penalise companies with a low and falling level of provisions.
The electric utility, oil & gas and metals sectors generally record the highest level of provisions presumably relating to the clear-up costs of large projects (mines, plants, etc). Getting hold of this data is a little patchy, with our data provider only having data on only 40% of companies.