3 Quick & Dirty Tactics to Spot Financial Red Flags

1. Change in shareholding of major shareholder/management

If the major shareholder or senior management starts to offload their position, this could be a bad signal regarding the company’s performance. As they have access to insider information, they are sensitive on whether the company is doing good or having a bad time. Through closely monitoring the change in shareholding, we can get a sense of the insiders’ thoughts on the stock, thus allowing us to make informed decisions.

2. Abnormal fluctuations in accounting ratios

Poor business performance will be reflected in financial statements. For example, rising materials and labour cost will affect profit margin, raising expensive bank debts will impact interest coverage ratio. Ineffective working capital management will show in cash conversion cycle. However, it takes a considerable amount of time and effort for financial analyst and shareholders to understand the whole picture.

There is no need to build complex spreadsheets to compute the accounting ratios with the help of modern financial spreading software. A number of financial spreading software, including prominent players Evalueserve and SuperAcc, allow users to extract data from financial statements through scanning/pdf formats and generate IFRS comparable accounting ratios.

3. Financial text - the hidden gems in annual report

Management is required to disclose a large amount of information including the company business plans and strategies in the coming years. There are certain hints that might trigger the attention of investors - change in auditing firms, ambitious capex plans, etc. These actions can impact profits and cash flows significantly, yet it could be easily clouded and buried in the 300-pages report.

Amongst common financial spreading softwares, Superacc is one of the very few that is powered by Natural Language Processing (NLP) and Semantic Role-Labeling Schema (QSRL) capabilities and can automatically transfer financial text into structured data for easier analysis. This function allows users to capture important corporate actions and adjust investment policies accordingly.