Assessing Earnings Quality: Nuware, Inc

13 Pages Posted: 21 Oct 2008 Last revised: 8 Feb 2019

See all articles by Paul J. Simko

Paul J. Simko

University of Virginia - Darden School of Business

Angelo Carlo Carrascoso

affiliation not provided to SSRN

Abstract

Associate Jack Hereford must analyze the earnings quality of Nuware Imports. His specific task is to assess the accounting policies of Nuware as aggressive or conservative and then recast the current earnings of the company as if it had employed the accounting policies used by its closest peer. A number of adjustments are required, including those related to inventory, receivables, fixed assets, stock options, investments, and pensions. Through this exercise, one sees the interplay of various discretionary accounting policies followed by management, how to infer the monetary impact of that discretion, and how to assess adequately the profitability of one company relative to another.

Excerpt

UVA-C-2221

Rev. Nov. 11, 2013

Assessing Earnings Quality: Nuware, Inc.

Jack Hereford finished his second cup of coffee and flipped through the Nuware research file. He had been asked by Harry Malone to provide a “restatement” of Nuware's fiscal 2013 earnings, but unfortunately he had only a slight notion of how to proceed. Nuware was a midsize retailer based in the Midwest, and one of Wyburn Malone's largest institutional clients was interested in taking a substantial equity position in the company. One basis for the potential purchase was Nuware's continued earnings growth, particularly during a relatively difficult three-year period for the retail industry. As of its most current fiscal year, Nuware continued to show solid gains in both earnings and share price.

As was typical of any new research project conducted at Wyburn Malone, a first objective was an attempt at quantifying whether management leaned toward aggressive or conservative accounting policies. Hereford felt somewhat uncomfortable delving into any firm's accounting policies; he was not an accountant by trade, and moreover, this was only his second week at the firm. He clearly recognized the importance of this task, however, as many of the firm's clients depended on Wyburn Malone's investment analysis. Moreover, if in the end their final report indicated significant over- or undervaluation, Nuware might be profiled in Wyburn Malone's next newsletter.

Wyburn Malone

Wyburn Malone was an independent equity research firm servicing more than 40 institutional clients, each of whom had an annual subscription to the company's newsletter—the WM Report. The WM Report was published six times per year and concentrated on generating approximately 10 new target investment ideas, both long and short. Quality, rather than quantity, was the primary objective of the firm's research function. Recommendations generated by the research staff virtually always began with a thorough analysis of a firm's reported accounting data. Wyburn Malone's unique analysis and superb track record had led to rapid growth and one of the industry's highest client-retention rates. In addition to the WM Report, staff members were dedicated to providing research tailored to a client's specific needs, including recommendations about individual companies outside the scope of the newsletter and industry or sector analyses.

. . .

Keywords: accounting principles, financial statement analysis

Suggested Citation

Simko, Paul J. and Carrascoso, Angelo Carlo, Assessing Earnings Quality: Nuware, Inc. Darden Case No. UVA-C-2221, Available at SSRN: https://ssrn.com/abstract=908101

Paul J. Simko (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-1391 (Phone)

HOME PAGE: http://www.darden.virginia.edu/faculty/simko.htm

Angelo Carlo Carrascoso

affiliation not provided to SSRN

No Address Available

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