For February 20, our forensic accounting needles in a haystack come from a chemicals company with significant hidden non-operating expenses.

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Analyst Hunter Anderson found two unusual items in The Chemours Company’s (CC) 2018 10-K.

On page 32 of the financial footnotes, CC disclosed a $35 million increase to its LIFO reserves.

On page 60, CC disclosed $91 million in non-recurring legal and transaction costs.

Combined, these items decreased pre-tax reported earnings by $126 million (11% of reported pre-tax earnings). Without these adjustments, CC grew GAAP net income at an impressive 33% in 2018. However, when we remove these non-operating items, we see that CC grew net operating profit after tax (NOPAT) by 47%. Without analyzing the footnotes, investors would significantly understate CC’s true profits.

The Power of the Robo-Analyst

We analyzed 89 10-K filings yesterday, from which our Robo-Analyst[1] technology collected 9,139 data points. Our analyst team used this data to make 1,599 forensic accounting adjustments with a dollar value of $1.3 trillion. The adjustments were applied as follows:

  • 649 income statement adjustments with a total value of $78 billion
  • 675 balance sheet adjustments with a total value of $624 billion
  • 275 valuation adjustments with a total value of $551 billion

We believe this research is necessary to fulfill the Fiduciary Duty of Care. Ernst & Young’s white paper, “Getting ROIC Right”, demonstrates how these adjustments contribute to meaningfully superior models and metrics.

This article originally published on February 20, 2019.

Disclosure: David Trainer, Hunter Anderson, and Sam McBride receive no compensation to write about any specific stock, sector, style, or theme.

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[1] Harvard Business School features the powerful impact of our research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.

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