15 Red Flags to Watch Before Investing Your Hard-Earned Money in Any Stock
Red Flag 1: Cash flows don’t match profits
If a company shows profits but never has cash in the bank, it’s cooking something.
Example:
Yes Bank showed profits for years, but operating cash flow was erratic. Eventually, the truth exploded.
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Red Flag 1: Cash flows don’t match profits
If a company shows profits but never has cash in the bank, it’s cooking something.
Example:
Yes Bank showed profits for years, but operating cash flow was erratic. Eventually, the truth exploded.
Bookmark and retweet this thread to revisit it later
Red Flag 2: Promoter holding constantly decreasing
If the founders keep selling stake, they may know something you don’t.
Example:
Zee Entertainment promoters steadily reduced holding, triggering concerns about long-term commitment.
Red Flag 3: Promoter pledged shares rising every quarter
High pledging = desperation. If stock price falls, lenders sell and crash the stock.
Example:
DHFL had over 80% of promoter shares pledged before its collapse.
If the founders keep selling stake, they may know something you don’t.
Example:
Zee Entertainment promoters steadily reduced holding, triggering concerns about long-term commitment.
Red Flag 3: Promoter pledged shares rising every quarter
High pledging = desperation. If stock price falls, lenders sell and crash the stock.
Example:
DHFL had over 80% of promoter shares pledged before its collapse.
Red Flag 4: Promoter is always on TV
If the CEO is spending more time in studios than boardrooms, it’s probably a PR pump.
Example:
Several small-cap stocks like 8K Miles had flamboyant promoters doing media rounds right before the stock crashed.
Red Flag 5: Rising debt without matching earnings or interest coverage
If debt rises faster than profits, the company’s drowning silently.
Example:
Jet Airways had ballooning debt while interest coverage ratio collapsed before the final nosedive.
If the CEO is spending more time in studios than boardrooms, it’s probably a PR pump.
Example:
Several small-cap stocks like 8K Miles had flamboyant promoters doing media rounds right before the stock crashed.
Red Flag 5: Rising debt without matching earnings or interest coverage
If debt rises faster than profits, the company’s drowning silently.
Example:
Jet Airways had ballooning debt while interest coverage ratio collapsed before the final nosedive.
Red Flag 6: Too many subsidiaries and inter-company transactions
Complex structures = foggy finances.
Example:
IL&FS had over 250 subsidiaries. Nobody knew who owed what. Ended in one of India’s worst financial disasters.
Red Flag 7: Frequent change of auditors or resignations
Auditor exits = potential fraud red alert.
Example:
Manpasand Beverages lost its auditor Deloitte just before an earnings report. Stock crashed 95%.
Complex structures = foggy finances.
Example:
IL&FS had over 250 subsidiaries. Nobody knew who owed what. Ended in one of India’s worst financial disasters.
Red Flag 7: Frequent change of auditors or resignations
Auditor exits = potential fraud red alert.
Example:
Manpasand Beverages lost its auditor Deloitte just before an earnings report. Stock crashed 95%.
Red Flag 8: Very high dividend payout despite losses or falling profits
Looks generous, but it’s a trap to show “health”.
Example:
Reliance Naval paid generous dividends for years before going bankrupt.
Red Flag 9: Sudden rise in “Other Income”
If core business is weak but “other income” is rising — it’s hiding something.
Example:
Sintex started posting higher “other income” while sales and margins tanked.
Looks generous, but it’s a trap to show “health”.
Example:
Reliance Naval paid generous dividends for years before going bankrupt.
Red Flag 9: Sudden rise in “Other Income”
If core business is weak but “other income” is rising — it’s hiding something.
Example:
Sintex started posting higher “other income” while sales and margins tanked.
Red Flag 10: Regularly missing earnings guidance
One miss is fine. Repeated misses = management has no control.
Example:
Vodafone Idea constantly missed forecasts and fell from ₹120+ to penny stock levels.
Red Flag 11: Large related party transactions with little disclosure
This is how promoters siphon money legally.
Example:
Fortis Healthcare had suspicious payments to promoter-linked firms before SEBI cracked down.
One miss is fine. Repeated misses = management has no control.
Example:
Vodafone Idea constantly missed forecasts and fell from ₹120+ to penny stock levels.
Red Flag 11: Large related party transactions with little disclosure
This is how promoters siphon money legally.
Example:
Fortis Healthcare had suspicious payments to promoter-linked firms before SEBI cracked down.
Red Flag 12: Regulatory or tax raids kept under wraps
If news of ED/IT raids are hidden or downplayed — wait before buying.
Example:
PC Jeweller crashed after reports of regulatory probes — which weren’t disclosed upfront.
Red Flag 13: Promoters with history of failed ventures
Track record matters. Bad promoters don’t suddenly become good.
Example:
Kingfisher Airlines was promoted by a flamboyant businessman with a string of prior controversies. We know how that ended.
If news of ED/IT raids are hidden or downplayed — wait before buying.
Example:
PC Jeweller crashed after reports of regulatory probes — which weren’t disclosed upfront.
Red Flag 13: Promoters with history of failed ventures
Track record matters. Bad promoters don’t suddenly become good.
Example:
Kingfisher Airlines was promoted by a flamboyant businessman with a string of prior controversies. We know how that ended.
Red Flag 14: Creative accounting in inventory or receivables
If receivables balloon while sales are flat — company might be booking fake sales.
Example:
CG Power had inflated receivables and bogus numbers — exposed in 2019 with massive restatements.
Red Flag 15: Obsession with global expansion despite weak home market
If a company can’t win in India, why burn cash abroad?
Example:
Gitanjali Gems aggressively expanded overseas — while defaulting at home. Led to the ₹13,000 crore Nirav Modi fraud.
If receivables balloon while sales are flat — company might be booking fake sales.
Example:
CG Power had inflated receivables and bogus numbers — exposed in 2019 with massive restatements.
Red Flag 15: Obsession with global expansion despite weak home market
If a company can’t win in India, why burn cash abroad?
Example:
Gitanjali Gems aggressively expanded overseas — while defaulting at home. Led to the ₹13,000 crore Nirav Modi fraud.
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