How to Find Red Flag while Analysing Companies !
Hello guys hope you all are doing fine , Wishing Everyone a Very Happy Holi .
Two months have passed in 2023 ,after a dull 2022 ,Indian equity market is showing strength now , hoping for better days ahead .
I believe still India has lot of potential , Indian market has long way to go and we must not miss the opportunity to make our fortune out of it .
But while investing our hard earned money in the stocks ,we must Analyse it carefully ,cause investing in companies with financial irregularities may wipe our entire capital .
In this blog we shall try to point out few checklist to consider while analysing Financial of a company to find out Financial Flaws . A intelligent investor must deal with these red flags with caution .
1. Debt to Equity Ratio
“Companies that have no debt can’t go Bankrupt ” ~ Peter Lynch . A company having debt to equity ratio more than 0.7 should be dealt with high caution as high debt can spell demise of a company .
2. Capital Allocation
Check past track record of investing in non core business ,if you find any kind of misallocation of funds stay away from that company .
3. Rewarding Shareholder
A good company should reward it’s shareholder once it is in good condition , check out dividend payout and share buyback history
4. CashFlow
A significant mismatch between cashflows from operation and operating profit may indicate a company’s inability to convert profit into cash . Check CFO to EBITDA , if it is lower than 50 % then don’t invest in that company .
5. Related Party Transaction
High loans and advances to related parties as per cent of net worth could signal fund diversion from the company .
6. Contingent Liability
A high ratio of contingent liabilities to net worth indicates the growing threat posed by off-balance-sheet liabilities to a company’s net worth.
7. Auditor’s Opinion
If auditor issue any red flag in financials ,or company’s auditor or CFO resigns then investor should look into the matter very seriously .
8. Capital Work In Progress
This ratio tells us whether or not a company is undertaking any unnecessary capital expenditure . CWIP represents the money spent on the development of fixed asset which are under construction ,PPE that is gross property , plant and equipment cost . If a company report consistent increase in CWIP/gross PPE metric are either taking unnecessary expenditure or facing any delays in commissioning PPE . Find out whether the capital expenditure is meant for the core business and not for any unrelated business . check whether related parties involved in the transaction , the promoter could be diverting funds .
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