Having said that, not all managers and accountants are as straight as we would like, so here is a list of what you can do to avoid being taken for a ride:
Pay close attention to the notes to the accounts. Many analysts read the accounts backwards working from the notes, through the cash flows, balance sheets and profit and loss until finally reaching the points that were supposed to impress (and possibly mislead) them at the front of the annual report and accounts. Reading the notes first will highlight issues tucked away, such as goodwill, amortisation, exceptional items and capitalised interest that will not be presented in the profit and loss, balance sheet and cash flows. When you reach the main accounts you will have the information to allow you to make adjustments so that ratio analysis is more meaningful. When reading the accounts ask yourself which numbers you would manipulate if you wanted to bias the figures. Get data from other sources. Brokers' reports can give a critical appraisal of the company's accounts. Know more on Sukanya Samriddhi Account You can obtain information about the directors' past lives by, say, conducting an Internet search — tap their names into a search engine and see what comes up. Industry analyses are available from the specialist websites ICC (www.icc.co.uk) and Dun and Bradstreet (www.dnb.co.uk). Focus on cash. Being creative with cash flow figures is much more difficult than being creative with profits and balance sheets. Be sceptical about companies that show high and rising profits with low cash flow. A very useful measure is the cash return on capital employed in the business. It suffers far less from biased accounting than earnings-based measures.
Check accounting policies. If accounting policies (e.g. on depreciation) have changed from the previous year then watch for the effect on profits. Ask questions such as: does the reduction in depreciation boost profit artificially, or is it justified? If there is not enough information in the accounts then you could ring the investor relations department of the firm to ask for an explanation of the accounting policies.