Step 9: Red Flags

Now it’s time to check for red flags signaling a potential earnings shortfall in the current or next quarter and for yellow flags warning of longer-term problems. At your option, you can compare net income to operating cash flow, and if your candidate passes that test, skip the accounts receivables and inventory tests.

Sales Growth

A slowdown in historical year-over-year sales growth rates is a red flag, but if it exists, you would have discovered it in Step 8. In this section, you’ll compare forecast sales growth rates to historical trends. It’s a red flag if the forecast sales growth rates are significantly below historical levels.

Table 17-17 shows the quarterly sales summary for Impath that was shown in the Step 8 (Table ...

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