Four red flags for the Angling Direct (LON:ANG) share price

Accounting errors often entail a swift and severe downgrade from the market. What most investors don’t realise is that there are algorithmic ways to check the credibility of company earnings - and one of them is called the Beneish M-Score. In this article I’m going to explain how it works by looking at Angling Direct (LON:ANG) as an example.

About Angling Direct (LON:ANG)

Angling Direct is a speculative, micro cap in the Internet Services industry.

In terms of price performance, the Angling Direct share price has seen 1-year relative strength against the FTSE All-Share index of -33.9%.

When it comes to earnings, analysts are currently forecasting that Angling Direct's earnings per share will grow by % in the current financial year.

While those figures sound promising, the Beneish M-Score - which I’ll explain shortly - shows that there are areas in Angling Direct's accounts that might be worth closer investigation.

How the Beneish M-Score works

Professor Beneish’s M-Score looks at the year-on-year change in eight different ratios that can be worked out from a company’s financial statements. It looks for these red flags:

• Inflated revenues
• Declining gross margins
• Capitalised and deferred costs
• Excessive sales growth
• Lengthening depreciation periods
• Rising sales expenses
• Increasing leverage
• Higher accruals

Ideally, you and I would want our stocks to be passing these checks with ease. But when a company fails one or more of them, it’s time to dig deeper into the accounts to find out why.

Are there accounting risks at Angling Direct?

Here is a graphic that shows how Angling Direct stacks up against the M-Score checklist and highlights areas to investigate.

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