1. It's important for retail stock investors to ensure that a company’s management is "squeaky clean", as their direct control over it is minimal, by carefully looking at its cross-holdings, if any, to find out if these, or their promoters, have questionable credentials or are involved in litigations.
2. As it's difficult to say that a company is involved in accounting frauds, it's best to avoid buying its stocks altogether if there's slightest hint of manipulation.
3. Avoiding "wrong" stocks is as important for smart investing as picking "right" ones, through a few "Red Flags" enumerated below:-
a) Compare the company's Revenue and Receivables growth, as continuously high growth in Receivables could indicate fictitious sales as Receivables.
b) If a company is reporting positive and rising profits, but negative or declining Operating Cash Flow, it could mean that it's showing accounting earnings, without any actual cash.
c) If a company doesn't report the inventory used in producing goods as a cost, this increases the inventory in Balance Sheet and reduces net expenses, thereby boosting profits, which constitutes a fraud.
d) If you're unable to understand an unusual / unheard-of asset on a company’s Balance Sheet, it's best to avoid its stocks as it may have "hidden" an expense as an asset there, to boost profits, instead of actually showing it in Income Statement as a real expense.
e) If a company's revenue is not seasonal in nature, and it still shows abnormal growth in its last quarter's revenues to boost annual figures, it's best to avoid it.
2. As it's difficult to say that a company is involved in accounting frauds, it's best to avoid buying its stocks altogether if there's slightest hint of manipulation.
3. Avoiding "wrong" stocks is as important for smart investing as picking "right" ones, through a few "Red Flags" enumerated below:-
a) Compare the company's Revenue and Receivables growth, as continuously high growth in Receivables could indicate fictitious sales as Receivables.
b) If a company is reporting positive and rising profits, but negative or declining Operating Cash Flow, it could mean that it's showing accounting earnings, without any actual cash.
c) If a company doesn't report the inventory used in producing goods as a cost, this increases the inventory in Balance Sheet and reduces net expenses, thereby boosting profits, which constitutes a fraud.
d) If you're unable to understand an unusual / unheard-of asset on a company’s Balance Sheet, it's best to avoid its stocks as it may have "hidden" an expense as an asset there, to boost profits, instead of actually showing it in Income Statement as a real expense.
e) If a company's revenue is not seasonal in nature, and it still shows abnormal growth in its last quarter's revenues to boost annual figures, it's best to avoid it.