Karl Decker, CFA, is analyzing Keystone Semiconductor to determine if the stock would be a good investment. He has determined the following:- Management owns 15 percent of the outstanding shares.
- Internal growth targets are aggressive.
- In recent quarters, profit growth has been exceptionally high.
- The company’s debt covenants are quite lax.
All of these characteristics are positives from the perspective of an investor looking for profit growth. But Decker is concerned about pressure on management to manipulate results. Which of the following should least concern Decker? | B)
| Recent operating results. |
| C)
| Management’s share holdings. |
|
Aggressive growth targets and high management ownership represent incentives to manipulate earnings. Extremely high growth often goes hand in hand with financial instability. But while strict debt covenants could drive management to manipulate earnings, lax covenants give management less reason to manipulate earnings. |