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In Finance, what is Round-Tripping?

Round-tripping in finance refers to a company conducting superficial transactions that inflate its volume of business without altering its actual financial position. This can artificially boost revenue figures, misleading investors about the company's true health. It's a deceptive practice that can have serious legal repercussions. How does this impact your investment decisions? Let's examine the implications together.
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum

Sometimes known as round trip transactions or by the fanciful designation of Lazy Susans, round-tripping is a strategy in which an asset is sold to another business with the agreement that the asset will be repurchased by the original owner at some point in the future. This process is sometimes used as a means of increasing the apparent amount of sales and revenue generated by the seller during a specific financial period. While a relatively common process, not everyone in the financial community considers this a proper method of doing business.

Typically, round-tripping involves the sale of an asset that is not essential to the core operation of the business. Since the asset is more or less unused, the temporary sale strategy will not impact the function of the business in any manner. It will allow the business to count the proceeds from the sale as part of the revenue that is generated for the period in which the transaction takes place. As a result, the company can claim to have higher sales volume, a fact that is likely to attract more attention from investors as well as raise the business’s public profile among consumers.

Round-tripping involves an asset sold from one business to another with the agreement that the asset will be repurchased by the original owner at some point in the future.
Round-tripping involves an asset sold from one business to another with the agreement that the asset will be repurchased by the original owner at some point in the future.

Key to the process of round-tripping is the agreement to repurchase the sold asset at some future point. Often, the repurchase is for the same asset, although in some cases, an asset of similar type and value may be substituted. In terms of the repurchase price, the original owner may pay the same amount that was accepted for the initial sale, or possibly pay slightly more, depending on the terms agreed upon by the two businesses.

There are dangers associated with the use of round-tripping. One is that a company can become so involved with this sort of activity that it becomes extremely difficult to determine what portion of the generated revenue is from actual sales and what is generated through the use of Lazy Susans. In addition, the repurchase aspect of the strategy can sometimes create a degree of financial hardship for the business that exceeds any benefits derived from the original sale. Some investors choose to not deal with companies known to engage in frequent round-tripping as a matter of personal conscience.

Many different types of companies have made use of round-tripping in the past. A number of manufacturing companies have engaged in this type of asset bartering, as have many energy trading conglomerates. In recent years, prominent Internet providers and related businesses have also made use of this type of financial strategy. This has led some regulatory agencies, such as the Securities and Exchange Commission in the United States, to determine that counting revenues from these types of transactions among sale figures is misleading and therefore improper.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

Learn more...

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    • Round-tripping involves an asset sold from one business to another with the agreement that the asset will be repurchased by the original owner at some point in the future.
      By: goodluz
      Round-tripping involves an asset sold from one business to another with the agreement that the asset will be repurchased by the original owner at some point in the future.