Warning Signs in a Financial Statement
1. Changes in Accounting Practices
Look for changes in accounting practices which increase revenue, or decrease
expenses, when the actual operation of the company did not change. The
company may be trying to appear more prosperous than it really is.
Look for changes in accounting practices which decrease revenue, or increase
expenses, when the actual operation of the company did not change. The
company may be trying to deflate profit now, so that it appears to be
growing in
profitability in the next few years.
2. Long term commitments
Look for long-term commitments, such as long-term commodity purchase
agreements, which may be detrimental to the company in the future if the
market for that product changes.
3. A series of mergers and takeovers
Companies have been known to acquire a series of smaller companies, often
unprofitable, in order to manipulate the consolidated balance sheet in
their
favor, or to hide the unprofitability of the original company.
4. Growing inventories
What are the reasons for growing inventories? Does the company
have difficulties selling its products?
5. Long footnotes
explaining write offs and unusual items.
If you have any questions regarding a financial statement don’t
hesitate
to contact the company in question. They should be willing to give you
satisfying answers.
