Lesson 04 — Accounting Red Flags Checklist
Week 09 · Lesson 4 of 5 · Week 09 — Governance & Red Flags
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Use this before investing in any company: 1. Revenue growing but CFO declining — paper profits, not real cash 2. Receivables growing faster than revenue — cu...
The 10-point red flag checklist
Use this before investing in any company:
Financial red flags
- Revenue growing but CFO declining — paper profits, not real cash
- Receivables growing faster than revenue — customers aren't paying, or channel stuffing
- Inventory growing faster than revenue — products aren't selling
- Capitalising expenses — putting regular expenses on the balance sheet to inflate profits
- Frequent "exceptional items" — if it happens every year, it's not exceptional
Governance red flags
- Promoter pledge > 15% — financial stress at the promoter level
- Promoter holding declining without clear reason (ESOS, QIPs don't count)
- Large RPTs without proper disclosure — potential wealth transfer
- Auditor change or qualification — trust issue
- Too many board members from promoter family — lack of independence
The 3-strike rule
1 red flag = investigate further. 2 red flags = be very cautious. 3+ red flags = probably avoid the stock.
Indian examples (without naming specific companies)
- A well-known conglomerate was found diverting funds through shell companies via RPTs
- A pharma company's auditor resigned and stock fell 70%
- A housing finance company's promoter pledge triggered a cascade of margin calls
Key takeaway
Do your OWN due diligence. Trust numbers, verify with cash flow, and check governance. "Invest karne se pehle, red flags zaroor check karo."