When considering companies for investment, it is easy to take a lazy approach by quickly scanning financial statements and forming conclusions based solely on the numbers. Unfortunately, companies make accounting choices which can drastically alter the meaning of their financial data.
Don’t Believe The Numbers
One such choice concerns the accounting treatment of inventory: FIFO vs LIFO. While in the majority of cases this difference is not large enough to matter, it can make substantial differences in a handful of companies, and in the extreme case it could be the difference between a “buy” and a “don’t buy”!
Consider A.M. Castle (CAS), a metals and plastics distributor. While it currently lists inventory at $232 million, it has made a conservative accounting choice (LIFO) that not many companies make; its inventory would actually be listed at $340 million were it to adopt the more prevalent FIFO method of inventory accounting.
While this may not seem like a noteworthy distinction (and in many cases, it isn’t), consider how this affects the net current asset value of CAS compared to its market value:
Clearly, investors who took the time to evaluate the company’s financials by digging deeper than what’s on the surface could have found value that others had missed. For a discussion on A.M. Castle’s suitability as a potential value investment, see this article.
Disclosure: Author has a long position in shares of CAS