- There is potential for alpha in the discrepancies between GAAP metrics and business reality.
- Investors can find alpha by identifying accounting flaws that will resolve themselves and understanding how other investors will trade on that information.
- Return on Equity (ROE) is a key metric in GAAP accounting and can be used to identify business unit performance.
- Accounting outputs in GAAP are tied to the relationships that businesses build and maintain.
- There is an opportunity for alpha by reevaluating GAAP accounting based on business relationships.
Every mismatch between GAAP metrics and business reality is a potential alpha opportunity. Investors can find alpha by identifying accounting flaws that will resolve themselves and understanding how other investors will trade on that information.
Return on Equity (ROE) is a key metric in GAAP accounting and can be used to identify business unit performance. However, accounting does not perfectly correspond to business reality. Businesses run on relationships, and their GAAP accounting outputs are tied to the relationships that they build and maintain.
By reevaluating GAAP accounting based on business relationships, there is an opportunity for alpha. This can be done by categorizing each line item in GAAP accounting by the type of business relationship involved.
In the next memo, this new perspective will be applied to revenue recognition, the cash conversion cycle, and free cash flow.
Source: Lampa Capital Library
