Detecting the red and yellow flags will often be your first clue that a company’s growth rate is peaking. Getting out before the news becomes common knowledge can help you avert big losses. These red flags warn of potential reduction in the company’s sales and earnings forecasts in the coming weeks or a negative report at report time.
Slowing sales growth
Accounts receivables increasing faster than sales
Inventory levels increasing faster than sales
Reported net income increased by pension plan income
Watch out for these yellow flags warning of potential problems down the road, but not necessarily by the next earnings report.
Capital expenditure lagging depreciation write-offs
Temporarily low income tax rates