Investing is all about finding a reason to say no as soon as possible.
Here are 10 red flags you should watch out for:
1. 🚨 Declining Gross Margins
If revenue grows but gross margin shrinks, the company might be facing rising costs or pricing pressure.
A warning sign of declining competitiveness.
2. 🚨 Consistently Negative Free Cash Flow (FCF)
Net income is one thing, but if FCF is persistently negative, the business may be unsustainable without external funding.
Visual by .velotrade
3. 🚨 Unusual Revenue Growth
Massive jumps in revenue without a clear explanation or without corresponding cash flow often suggest aggressive (or questionable) accounting.
4. 🚨 Frequent One-Time Charges
Non-recurring items should be rare.
Frequent “one-offs” may be a tactic to manipulate earnings and hide real business performance.
5. 🚨 Sudden Increase in Accounts Receivable
If receivables grow faster than revenue, the company might be booking sales that haven’t been collected.
This may be a potential signal of weak cash inflows.
6. 🚨 High Debt-to-Equity Ratio
Excessive leverage can put the company at risk in downturns.
Watch for rising debt levels without a clear use or return on capital.
Visual by R.E.tipster
7. 🚨 Inventory Buildup
Growing inventory could mean weak sales or overproduction.
Could lead to write-downs or discounting later.
8. 🚨 Auditor Red Flags or Resignations
If an auditor resigns or issues a qualified opinion, take it seriously.
This is a huge signal something may be wrong behind the scenes.
9. 🚨 Management Compensation Misaligned
Watch out if executive pay is rising while profits or shareholder returns aren’t.
Incentives drive behavior: misaligned ones lead to trouble.
10. 🚨 Complex or Vague Disclosures
If the footnotes and MD&A sections are overly complex or obscure, the company may be hiding risk or bad news in plain sight.
I can't stress the importance of spotting red flags enough.
Here's an e-book with even more red flags: compounding-quality.kit.com/d0c5a57cf2
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