Scrutinize the KPIs a company chooses not to highlight. For instance, Lumine and Topicus eschew standard metrics like EBITDA and ARR, instead framing their performance around a custom "Free Cash Flow Available to Shareholders" metric. This reveals their deep focus on cash generation for M&A, not chasing growth narratives.

Originally, EBITDA was a tool for leveraged buyout investors to see if a company could cover debt payments if it halted all capital expenditures. Its evolution into a primary metric for overall business health ignores critical factors like working capital and maintenance CapEx, distorting reality.

Block states most of his work targets companies that violate the spirit, but not the letter, of the law. These "gray zone" activities, like creative expense categorization, can massively manipulate financial statements, yet investors often dismiss them because they aren't legally defined as fraud.

WeWork created "Community Adjusted EBITDA," a metric that conveniently excluded core costs like rent and salaries. This farcical KPI incentivized top-line growth at any cost, masking massive unprofitability and ultimately destroying shareholder value. Be wary of overly creative accounting.

Beyond outright fraud, startups often misrepresent financial health in subtle ways. Common examples include classifying trial revenue as ARR or recognizing contracts that have "out for convenience" clauses. These gray-area distinctions can drastically inflate a company's perceived stability and mislead investors.

The use of "adjusted EBITDA," which includes unrealized synergies and cost savings, has doubled over a decade. This practice makes leverage appear lower than it is on a reported basis, concealing significant risk. An S&P study confirmed these adjustments are rarely realized, particularly in the single-B space.

Before analyzing a balance sheet or income statement, read the footnotes. They act as a legend, revealing the specific accounting choices, definitions, and modifications management has made. This context is essential to accurately interpret the numbers and understand the underlying business reality.

Fahmi Quadir explains that businesses with deteriorating fundamentals will almost always resort to financial engineering to hide their problems. This creates a powerful link for short sellers: identifying a company with a broken business model is a strong indicator of potential accounting fraud.

The era of easy money is over, forcing a reckoning on EBITDA adjustments. Lenders are more skeptical of prospective add-backs, while sponsors must now generate real operational improvements to achieve target returns. The tailwinds of cheap financing and multiple expansion that previously masked underperformance have disappeared.