Company management has, at times, been known to 'stretch the truth' when communicating with investors. So, with February reporting about to start in earnest, we thought it timely to highlight 6 common types of 'mistruths' to keep a watch for...
1) The Massive Percentage Increase
This is a favourite trick of the fledging start-up with modest revenues. Of course, 100%+ or even 1,000%+ increases sound great as headline numbers. But one needs to 'strap on the snorkel' and take a deep dive into the actual numbers to get a real sense of the significance of these figures (which typically amount to being not very significant). Take these two examples:
"Gooroo delivers revenue growth of 100% in Q2" ... From $34k to $69k!
2. The Multi-Billion-Dollar Market Size
Oh! The potential of our business in a market with a mind-boggling market size. Imagine the profitability if our company could gain just a 1% market share?
That's really like saying, "Imagine how much I could win I picked all 7 numbers in this week's Powerball".
"Smart city spending will grow to US$758 billion by 2020" Buddy 2017 AGM 30/11/17
3. The Total Potential Long-Term Contract Value
This is when a company considers a newly penned, long-term contract, multiplies all the revenues and adds them up over the contract length to come up with a large number that might occur if absolutely EVERYTHING goes right. Although that's probably unlikely.
4. The Difficult-to-Verify International Contract
I'm sure it's not just me that raises a sceptical eyebrow when an Australian business signs a significant contract in far-flung, often non-English-speaking, jurisdiction in which they've previously had little market presence.
5. The Attractive 'Relative Valuation'
Let's search for somewhat similar businesses, select the most outrageously over-valued and note how cheap our company is in comparison. This trick is commonly found amongst the biotech sector where drug companies occasionally get taken-over for big prices by US or European counterparts.
Take a look at Oncosil’s comparison to Sirtex
6. The Optimistic Broker Price Target
Oddly enough, it is often the same broker that has helped the company raise funds in the market that has the 'strong buy' and the attractive price target for the stock. Don't underestimate the perceived conflicts of interest from having a house broker writing a glowing report whilst raising capital.
For example, Aesir Capital’s $7.33 price target on GetSwift.
For further insights from Cyan Investment Management, please visit our website.
Dean has over 25 years experience in the funds management industry covering all major asset classes. He holds as Master of Applied Finance and is a Graduate of the Australian Institute of Company Directors.
Assuming that the company can be bothered to disclose price-sensitive information at all. I often get the impression that the management in many listed companies have somehow concluded that the 'continuous disclosure' requirement is optional.