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Anonymous

27 Jun 2019

Red flags to look out for when investing in a company?

Are there any prominent indicators that I should be aware of when it comes to investing?

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    What are your thoughts?

    Below 1 TIE Ratio for consecutive years is a definite red flag for me. This means they can't even produce enough earnings to cover the interest payments owed by them to their creditors. If their assets aren't able to pay off their debtors, equity holders will get absolutely nothing (hyflux). A big big lesson to learn there is that we need to be extremely clear that private companies aren't going to be bailed out by the government because of poor management, and unrated bonds must have even higher scrutiny involved regarding financial statements to see that they can meet their obligations.

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      Hi there!

      Some red flags I would look out for include 1) Turnover of CFO, 2) high profits, low cashflow, 3) frequent, non-recurring gains (or losses)

      1. Turnover of CFO

      The turnover rate of CFO could give insights into how the finances of the company is panning out. The CFO has first-hand information about where the revenues are generated, where the outflows are, what the ROI is and how the resources are allocated. A CFO quiting could potentially mean the company is headed for disaster or that the company is doing something behind the scene that requires some scrutiny.

      1. High profits, low cash flow

      A profitable company with insufficient cashflow can put the company at risk of bankruptcy. For example, Toys "R" Us initially was a profitable business however year or year it had an increasing cash outflow required to service its interest payments. Due to the huge interest payment and decreasing sales, the firm was forced into bankruptcy.

      1. Frequent, non-recurring gains

      Non-recurring gains and losses should not occur frequently because they do not relate to normal business operations. If there is a trend of non-recurring gains and losses, it could be that the company is finding ways to write off or write down transactions to make the business look a certain way.

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        Hi there!

        One ratio that I might want to take a closer look at is the **Debt Service Coverage Rati...

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