Hello,
I'd like to start a discussion of red flags that people look for in financial statements to identify potential problems with investments. Specifically I'm interested in any red flags that you look for when analyzing any of the following:
- The income statement
- The balance sheet
- The cash flow statement
Some examples I check for:
- Outliers in various line items (e.g. large increases/decreases in cash, debt, accounts receivable)
- Unexplained divergences in growth rates (e.g. revenues growing at 150% while net income only grows at 10% a la Enron circa 2000)
- Cash burn rate and burnout time based on cash balance
- Revenue growth slower than cost growth even if both are increasing
- Fluctuations in various line items as a percentage of sales/net income (e.g. inventory, receivables, etc)
There are tons of others obviously but this is the kinda stuff I'm looking for.
Also, anything you look for in terms of SEC filings would be good to bring up. For example I always read the MD&A in the 10-k to get an understanding of short term liquidity requirements and monitor outstanding shelf offerings to avoid investing in names that are too likely to dilute too much while I'm holding.
These checks are not for short term trades, but more for mid- to long-term INVESTMENTS. So, are there any red flags yall look for when analyzing financial statements or SEC filings that could indicate potential problems, or manipulation/fraud/padding earnings and the like?
Thanks!
Submitted April 10, 2017 at 01:51PM by ghostofgbt http://ift.tt/2oYuk2A
