Chapter 19 · Day 19 — Screening, scoring and red flags
The red-flag checklist
None of these proves anything on its own. Two or three together are a reason to stop and read the notes properly.
24 of 30 · 12 min
Red flags are questions, not verdicts. Each has an innocent explanation; the job is to find out whether this company has one.
| Flag | Why it matters | Innocent explanation |
|---|---|---|
| Profit up, operating cash flow down | Earnings may not be real | A genuine one-off working-capital build |
| Receivables growing faster than sales | Sales on looser credit | A large late-year contract |
| Inventory growing faster than sales | Goods are not selling | Stocking for a known order |
| Rapid debt growth | Risk rising | Funding a specific project |
| Repeated rights issues | Dilution; cash burn | Regulator-required capital |
| Interest cover falling | Less room for a bad year | A year of heavy investment |
| Large related-party transactions | Value may leave the company | Normal group structure |
| Big one-time gains | Flatters earnings | A real asset sale |
| Falling ROE with rising leverage | Returns bought with debt | A transition year |
| High NPL with low provision coverage | Losses not yet recognised | Recent, well-secured defaults |
| Auditor qualification | The accounts themselves are disputed | Rarely innocent — read it |
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