Early on I learned the quote that “Statistics never lie, but liars use statistics!”  Over the years I’ve gotten to see some SLAs that sure sounded good but would be impossible to ever breach.  There also are plenty of companies that use statistics to make performance sound so much  better than it is, especially since most people don’t really understand the difference in statistical terms like mode, mean and median.

Firms are doing similar things with accounting and hiding expenses or creating false economies of scale as they relate to COGS (Cost Of Goods Sold) .  I’d like to offer up a hypothetical company and give an example of how firms are playing shell games.  Investors stand to get duped if they just go with the bullet items and don’t research.

Imagine a trucking company with only 50 trucks.  At this size they are experiencing some economies of scale.  Sure, they can negotiate slightly better rates on parts, trucks and fuel.  And their mechanics will certainly scale better too since they can be distributed across a large fleet compared to firms that only have 10 or 15 trucks.  The maintenance and repairs are easier to predict with a large fleet.

But now let’s talk about a new firm with 1000 trucks but only 100 paying customers.  They have hundreds, if not thousands, of other customers where they deliver for free.  I realize that this defies logic, but so much of the economy right now does at times.  The firm with 1000 trucks is able to negotiate much better prices for trucks, fuel, insurance and parts.  But imagine if they recorded the cost of the free deliveries as an advertising expense.  Those trucks have a big logo and name painted on the side and they can claim in their books that these “free” deliveries are part of advertising.

This allows them to claim that their Cost of Goods Sold is incredibly low for the 100 paying customers.  But the reality is that these low costs are only there because of an economy of scale that the giant “marketing expense” falsely inserts into the equation.  Their “profit margins” are not real, nor are they sustainable.

How would you feel as an investor to find out this was how they arrived at their claims of a very low COGS number and a huge profit margin?  What would happen if they no longer offered free shipping to get their “rolling billboards” on the road?  How much would their COGS go up?  Time will tell.  GAAP in itself doesn’t lie, but liars can use GAAP.

Photo credit – Christian Chen on Unsplash