Investing Toolkit
Red Flags To Watch Out For
A Fiscal Investor doesn’t need to predict every winner — we avoid the obvious losers. Use this checklist as your “first filter” before you spend time modeling a business.
🧾 Balance Sheet Stability
- Too much goodwill (watch for serial acquisitions hiding weak organic growth).
- Rising days of receivables (customers paying slower → cash pressure).
- Inventory rising faster than profits (demand may be weaker than the story).
- Excessive borrowings (leverage makes bad quarters fatal).
- Rising loans to related parties (conflicts and governance risk).
- Too much cash in current accounts (idle cash + weak capital allocation discipline).
📈 Income Statement Earnings Quality
- Revenue rising slower than profits for long periods (margins may be “managed”).
- Capitalizing R&D and interest costs (boosts reported earnings today, costs later).
- Frequent, large extraordinary items (“one-time” becomes “every time”).
- Sharp decline in taxes (may reverse; check sustainability).
- Net profit lower than cash from operations (look for accounting distortions).
- Overstated revenue via one-off income (non-recurring gains dressed as growth).
🕵️ Other Signals Governance
- Abrupt change in auditors (especially after disputes or delays).
- Negative audit opinions (take seriously, always).
- Sudden exits of top managers (culture, controls, or “surprises” ahead).
- Reduced disclosures (less transparency = more risk).
- Board lacking competence (weak oversight invites bad behavior).
- Excessive management compensation (misaligned incentives).
- Boastful or promotional management (storytelling over substance).
Fiscal Investor Rule
Red flags don’t automatically mean “sell” or “short.” They mean: slow down, verify the facts, and demand a higher margin of safety. If you see multiple flags across statements and governance, the smartest move is often the simplest one: pass.