Shares of Spanish pharmaceutical company Grifols (NASDAQ:GRFS) are plunging lower following the publication of a short report from Gotham City Research. The research firm has alleged that Grifols has been manipulating its financial metrics.

First, Gotham believes that analysts misunderstand the company when using five- to 10-year EBITDA multiples in their valuation process.

“These 5-10 year figures are irrelevant, as Grifols business has fundamentally changed over the last 5 years – earnings from Non Controlling Interests (“NCI”) have grown from nearly 0% of earnings in 2017 to nearly 100% of earnings as of 2023 YTD,” said Gotham.

GRFS Stock: 10 Things to Know About the Gotham City Short Report

Gotham also accuses Grifols of several undisclosed related party transactions, such as with Scranton Enterprises, a family investment vehicle of the company. These transactions have allegedly helped the company understate its leverage ratio of 6.7x, which Gotham believes is actually between 10x and 13x. A higher leverage ratio would equate to higher financing costs.

Let’s take a look at 10 things to know about the Grifols short report:

1. Gotham notes that Grifols reminds it of NMC Health, a company that it had previously published a short report on.
2. Grifols acquired BPC Plasma and Haema in 2018 and then sold the two companies to Scranton.
3. However, Gotham notes that both Grifols and Scranton have fully consolidated the two companies in their financials, which the firm characterizes as “materially deceptive and incorrect.”
4. Gotham states that Grifols does not have a stake in either company.
5. 99% of Grifols’ 2023 year-to-date profit was attributed to non-controlling interest (NCI).
6. Further, 40.1% of its 2022 profit from NCIs originated from BPC and Haema.
7. Grifols provided Scranton with a $95 million loan in 2018, which Gotham believes is connected to the BPC and Haema transaction.
8. However, Grifols did not disclose this loan in its financials, while Scranton did.
9. In response to the report, Grifols stated that it denies all of the allegations of wrongful accounting or financial reporting practices levied by Gotham.
10. The company also added that all of the related party transactions included in the report have been disclosed and reported since 2018.

On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.