Case File IV: Dividends, Deceptions, and Debt Disguises - Finacademics - The Sherlock Holmes of Finance

Click here - to use the wp menu builder

Introduction: Dividends paid from borrowed money. Revenues recognized on ghost contracts. What else lurks beneath the ink? This round leads you to numbers that look good… until you look twice.

Blurb: The CFO adjusted his tie. “We’re profitable if you ignore GAAP.” Holmes nodded. “And I’m tall if you exclude my shoes.”

Game 16: The Dividend Smokescreen

Despite negative earnings, the firm just raised its dividend. Bold or bluff?

Review cash from operations

Negative. The dividend is funded by debt. Smells unsustainable.

Compare net income and dividend payout

They’re overpaying. Something has to give soon.

Trust the board’s confidence

Don’t confuse tradition with prudence.

Game 17: The CAPEX Illusion

The company boasts free cash flow growth. But plant upgrades are long overdue…

Check maintenance vs growth CapEx

Clever! They’re deferring maintenance — inflating FCF temporarily.

Celebrate their efficiency

You fell for it! Deferred CapEx means future pain.

Review depreciation trends

Depreciation flat while asset base expands? Suspect.

Game 18: The Deferred Tax Trick

Net income is stable, but the effective tax rate swings wildly. Curious?

Investigate deferred tax assets/liabilities

They’re using tax credits from past losses to smooth results.

Trust their GAAP tax line

You’ve been duped by accrual illusion.

Review footnote disclosures

Bingo! They buried it under “other tax adjustments.”

Game 19: The Restructuring Ruse

Big one-time charges this year — “restructuring,” they say. Should you ignore them?

Compare to past years

This is their 4th “one-time” expense. Not so one-time after all.

Trust adjusted EPS

You let them distract you with asterisks.

Read 3-year history

Good sleuthing. Repeat charges = recurring problem.

Game 20: The Float Game

The company holds large cash balances. Investors cheer. But what’s the source?

Analyze customer prepayments

They’re floating on unearned revenue. Temporary cash.

Praise liquidity strength

Not so fast — it’s a liability disguised as strength.

Compare cash to obligations

Outstanding work. Liabilities dwarf the “free” cash.

Disclaimer:

The characters of Sherlock and Watson are in the public domain. This content exists solely to enlighten, not to infringe—think of it as financial deduction, not fiction reproduction.