This is an excellent follow-on reading to QualityOfEarnings. It helps to have a bit of accounting, but it's still good, regardless. In addition to the normal value investing "margin of safety" arguments, he covers Red Flags and Catalysts in investing:

1. Revenue Recognition is different for this company than for the rest of the industry.
2. Management's incentives are based extensively on increasing earnings per share, and the accounting treatments are controlled by management.
3. Unjustified changes to accounting policies.
4. Special structures/deals built primarily to increase earnings.
5. Letter to Shareholders does not adequately disclose how the firm makes money.
6. Management incompletely discusses prior poor results.
7. Abnormal inventory growth relative to sales.
8. Net Income is growing faster than cash flow from operations
9. Unexpected write-offs or charge-offs.
10. Large fourth quarter adjustments
11. Lends money to customers, or has equity stake in customers.

1. Internal
   1. New Management installed.
   2. New corporate strategy
   3. New Product strategies
   4. Change in Operational efficiency
   5. Cutting costs (equipment, WACC)
   6. Sustained tax reduction
   7. Reducing working capital needs
   8. Share buybacks
   9. Spin-offs, equity carve-outs, etc.
   10. Asset sales
   11. Liquidation: full or partial
2. External
   1. Shareholder Activists
   2. Industry merger activity
   3. Fade out of an adverse catalyst