Accounting Ratios

Window dressing

Debt Window Dressing
We aim to highlight companies which may be window dressing their balance sheets in order to flatter their financial position. Typically, window dressing involves the repayment of debt just before the end of the accounting period. This is often financed through the factoring of receivables or sale of inventory. However, debt repayment creates an accounting entry in the financing section of the financial statements. As such, a high level of short-term debt repayment relative to the short-term debt disclosed at the beginning of the financial period can indicate that companies are window dressing. Furthermore, a high effective interest rate can be added confirmation that debt churn has been taking place. This is because the average debt level throughout the reporting period is actually far higher than disclosed at the period-end. As such, we use a combination of three red flags to highlight companies at risk:

  1. Has moderate debt relative to industry peers (1 point). Companies incentivised to window dress will have a moderate level of leverage. As such, we award a point to companies where debt relative to sales exceeds the 15th percentile of industry peers.

  2. Has high debt churn (1 point). Where debt repayment relative to the short term debt one year prior is in excess of 130% (placing it above the 69th percentile of global peers.

  3. High effective interest rate (1 point). Where the effective interest rate is in excess of the 80th percentile relative to country peers.


Ideally, we would have included some additional red flags on the factoring of receivables or sale of inventory but disclosure is generally not good enough.

We downloaded over 3,000 Asian companies with a market capitalisation exceeding US$1bn and applied our window dressing ratios to their 2015 financials. Around 7.7% of our sample triggered all three flags whereas theoretically it should have been closer to 3%. This suggests that there is a relationship between our flags. Large markets with the highest incidence of possible window dressing included Australia with 13%, followed by China with 10%.

Investments Window Dressing
We aim to highlight companies that invest in structured products but remove them from the balance sheet before the reporting period-end. As discussed in our report, SPECULATIVE INVESTMENTS: Now you see them, now you don’t (12 Oct 2017), the danger is that risk is being substantially understated given that, firstly, we have no idea what these investments relate to, secondly, they are likely high risk and, thirdly, the company's leverage is probably much higher than at the reporting period-end.

The tell-tale sign is companies generating a high level of proceeds from investments (in the cash flow statement) relative to investments outstanding (on the balance sheet). Proceeds are either temporarily put into cash or used to repay short term debt. This might help explain high debt churn rates, high cash balances and low returns on cash. Some companies might also have undisclosed repurchase agreements with banks in order to facilitate this form of window dressing. It is also possible that some companies are not window dressing but simply investing in short maturity investment products. Regardless, when triggered this red flag merits further investigation.

  1. High churn rate of investments relative to sales (1 point): Companies trigger a red flag when investment repayments to sales exceed the 80th percentile relative to peers, i.e. they are material.

  2. Churn large relative to investments (1 point): Companies trigger a red flag when repayments exceed investments outstanding at the beginning of the period.


Our preliminary work on the subject suggests that 25% of Chinese listed companies trigger this red flag whereas the incidence rate elsewhere in Asia is far lower at just 4.5%.