Wednesday, May 29, 2013

Beware of Red Flags

When you do a fundamental analysis of a company, always be on the lookout for Red Flags. Red flags are signals that signify trouble ahead. When you see a few Red Flags show in a company, that company is not good for investments. Some Red Flags to be awared of are as follows:-

01. Two consecutive quarterly reports of lower profits when compared to the corresponding periods of the previous year.

02. A rise in revenues that is not accompanied by a rise in profits.

03. Account Receivables go up but revenues remain the same or have become lower.

04. Current Ratio is less than 1.5, and Quick Ratio below 1.

05. Stock price trending down even though the main market is trending up.

06. Debt to equity ratio is greater than 0.5

07. Goodwill of more than 8% of capital

08. A cut in the dividend payment

09. Venturing overseas to go into business that the management is not familiar with

10. When the company is buying back it shares while insiders are selling.

Red Flags are important signals. If you choose to ignore them, you do so at your own peril.