Stock Red Flags & Risk Checks

Dilution

When a company sells new shares to raise cash, shrinking your ownership slice. Cheap, cash-burning companies do this often. 10M shares becoming 20M halves your slice.

How to check for dilution

See whether the share count rises each quarter.

Short interest

The percentage of shares that investors are betting against. High short interest means skeptics expect failure, and sometimes they're right.

Going-concern warning

Auditor language saying there is "substantial doubt" the company can continue. One of the loudest red flags in finance.

Reverse split

A company turning 10 shares into 1 to keep its price above exchange minimums. Often a sign of long decline.

Profit margins vs. industry

Compare to similar companies. A 5% margin is great for a grocery store and terrible for software.

Value trap (review)

Looks cheap because it's dying. Check whether profits are about to fall before trusting a low P/E.

Customer concentration risk

When one or a few customers drive most of the revenue, losing one can crater the business. Part of the "what could go wrong" check.

Debt due soon

A red flag because payments must be made regardless of how business is going. Part of the "what could go wrong" check.

Why sales growth is harder to fake than profit growth

Profit can be boosted temporarily by cutting costs, but a company can't cut its way to growth forever.