Red Flags In Financial Statements Of Corporates In The Banks

 Analysing Red Flags In Financial Statements Of Corporates In The Banks

Financial statements of corporates are crucial for making smart investment choices and credit risk analysis in banks. They include the balance sheet, income statement, cash flow statement.They reveal a company’s health and potential for growth. These are useful for investors, analysts, and other stakeholders to make informed decisions. However, financial statements can sometimes contain red flags – signals of potential problems or hidden irregularities. Knowing what these red flags look like is key to making informed decisions about investing or doing business with a company. ◼️Income statement 1️⃣ Gross Margin < 30% 2️⃣ Revenue Growth Rate <10% 3️⃣ Net Profit Lower than Cash From Operations 4️⃣ EBITDA margin <10% 5️⃣ Net margin <5% 6️⃣ Direct Costs Rising Faster than Sales 7️⃣ Interest Coverage Ratio <2 ◼️Balance Sheet 1️⃣ Goodwill in Assets > 20% 2️⃣ Debt to Equity Ratio > 2 3️⃣ Receivables Rising Faster than Sales 4️⃣ Inventory Rising Faster than Profits 5️⃣ Asset Turnover Ratio < 1 6️⃣ Current Assets Lower than Current Liabilities 7️⃣ Quick Ratio < 0.8 ◼️ Cash Flow Statement 1️⃣ Stock-based Compensation of Net Income > 10% 2️⃣ Capital Expenditures of Net Income > 25% 3️⃣ Low or Negative Cash Flow from Operating Activities 4️⃣ Free Cash Flow Declining 5️⃣ Free Cash Flow Lower Than Net Income 6️⃣ Cash Flow to Debt < 0.3 7️⃣ Operating Cash Flow to Sales < 10% ◼️Other Critical Areas 1️⃣ Complicated Group Structures ( ie numerous subsidiaries, parent companies or affiliated entities) 2️⃣ Significant Changes In Accounting Policies : Sudden shifts in accounting policies can be a red flag. Ensure changes are adequately explained and don't serve to manipulate financial results. 3️⃣ Contingent Liabilities & Commitments 4️⃣ Declining Market Share : A shrinking market share could indicate increased competition or a loss of consumer confidence. Stay vigilant about the company's competitive positioning. 5️⃣ Frequent Changes In Auditors: Repeated changes in auditors may raise concerns. Stability in auditing relationships is generally a positive indicator of a company's commitment to transparency.