Sunday, December 8, 2013

Red Flags that show a Company is in Real Trouble

  • Huge Goodwill figure in Balance Sheet
  • Current Ratio < 1
  • High Debt-to-Equity (High Gearing)
  • A very high number that is hidden in the notes, but not shown in the actual financial tables: Read the annual report backwards, because the stuff that directors really don't want you to find will be at the back.
  • Cash Flow not in line with Earnings: Compare FCF/share with EPS
  • Highlighted Adjusted EBITDA: This is directors' favourite number, because it always goes up
  • Key Management Changes: either they were brilliant and have been poached or they were rubbish and have been dumped
  • Directors dumping shares
  • Having only one "reliable" customer (eg. government)
  • Rapid Expansion: Expansion needs to be controlled