The 'Cooking the Books' Score gives a visual representation of the likelihood that a firm may be trying to 'pull the wool over investors eyes'. It is based on James Montier's 'C-Score' as defined in his book 'Value Investing'. There are six inputs, each designed to capture a common technique for massaging earnings, scored in a pass/fail fashion to create a score between zero (no sign of manipulation) and six (all flags present!).
Montier backtested the C-Score between 1993 and 2007 discovering that portfolios of stocks which scored 5 or 6 underperformed the market by 8% each year in the US. When combined with a high valuation measure (e.g. Price/Sales > 2) it generated an negative absolute return of 4% per annum.
Vodafone has a C-Score of 1 indicating
the company shows very little sign of massaging earnings.
Is there a growing divergence between profit and cashflow?
In general, managements have less flexibility in shaping cash flows than earnings. Earnings contain a large number of highly subjective estimates such as bad debts, pension returns etc. A growing divergence between net income and cash flows may also indicate more aggressive capitalisation of costs. (James Montier)
Is it taking longer to receive the cash after sales are booked?