Jurong Tech Case

From today's news, Jurong Tech is involved in a suspected fraud:

1. Inflating inventory by S$50m
2. Inflating sales revenue by $60m

As a retail investor, how would you know that the company that you are investing in did not cook up their books.

To avoid getting into such undesirable situations, you MUST read their annual reports. At least. A few things you can look out for:

1. Comparing across current year and previous year, are the increasing revenue (look at the Income Statement) accompanied by increased cashflow from operations (look at the Statement of Cash Flow). If it is not, and you see a corresponding increase in Account Receivables (look at the Balance Sheet), then it smells fishy. This is a hugh tell-tale sign.
2. Increasing Inventory is typically bad, unless they had plans for expansion.
3. Increasing Accounts Receivable is typically bad, and they may have to make provisions for bad debts at some point.
4. Negative operating cash flow is typically bad, and fishy if they claim to make a profit. Where did the profit go to would be a key question you need to satisfy yourself.
5. Always check the auditor's report for irregularities.

Of course, I'm generalising here.
In this case, looking at Jurong Tech 2007 Annual Report (their 2008 report is no longer meaningful as they are insolvent):

1. Audit report highlighted a suspicious revenue recognition behaviour
2. Made a profit but got negative operating cash flow, due to increasing inventory, increasing account receivable and decreasing account payable.

These 2 observations would probably have turned me off.

Bottom-line: Do not invest blindly into any company without going thru their books and understand any increases in their balance sheet, income statement, and cash flow statements.