3 ideas
Days sales outstanding (receivables divided by revenue, scaled to days) rising faster than the company's historical norm signals that reported sales are not converting to cash, often because of channel stuffing, extended payment terms, or premature recognition. Screening for sequential and year-over-year DSO jumps flags revenue that has been pulled forward from future periods before the income statement shows any weakness.
When net income grows persistently faster than cash flow from operations, the gap is being filled by accruals, which are management estimates rather than cash received. Because accruals must eventually reverse, a widening income-to-cash gap predicts future earnings disappointments and is a primary short-selling signal.
Manipulated earnings leave footprints on the balance sheet: inventory growing faster than sales (DSI), shrinking reserves and allowances being released into income, and costs capitalized as assets instead of expensed. Reading changes in these line items relative to revenue exposes how a company manufactured a reported beat instead of taking management's earnings headline at face value.