Question

explain five potential red-flags rating to financial relating to financial statement which should not be ignored by financial analysts?

Answer 1

Five financial Red flag a financial analyst should never ignore are as follows-

1.Debt Equity Ratio- debt equity ratio is the ratio of debt to the overall equity of the company. It reflects that company is utilising debt financing as a method to fuel its growth. when the return on capital is greater than cost of debt, it helps in fuelling growth of a company. But that can be lethal at times when the level of depth exceeds beyond the significance level that it impacts the operation of the company because it cannot repay periodic repayment obligation.

2. When the credit ratings of short term and long term bonds of the company as downgraded by credit rating agencies , it is a sign that they are sceptical about the future growth of the company so it can be seen as financial Red flag.

3. When there is a continuous downtrend in in revenue of the company, it is a sign that company is losing its market share and is not able to post good revenue growth so it can be seen as a sign of company which is not able to to retain its market share.

4. constantly decreasing profit margin is also a sign of financially stressed company because the company is not able to have control in pricing power so it has to slash the prices and as a result to that, profit margins of company significantly comes down. If there is a trend in declining profits margin it can be financial red flag.

5. Rising outstanding share count is also sign of financial distress of a company because of selling promoters stake in the open market, the outstanding shares goes up because there is dilution of the stake on the part of the promotors. If Outstanding shares in the market is increasing continuously,it is a sign that promoters are also not bullish on their business so they are selling their stake and realising the money out of it so the investor should be booking out on profits at such scenarios.