Value trap is an interesting discussion and everyone will have their fair share of experiences investing in these kind of companies.
A lot of investors are entrapped in such companies mostly because of quantitative data. Its either low PE, low P/B or assets on the book like cash or shares held of other companies, real estate, just to name a few.
These will often be uncovered by running a screener test. And most investors get stuck only at these levels without bothering to go to the next level of checks. A cursory glance at past few years of annual reports usually gives quite a good idea about the quality of the company. Most of the times we can check exactly what management was talking and what it has delivered.
As mentioned earlier by narender, dividends and taxes paid by the company are the signs of real earnings. We can keep these parameters firmly etched in our mind. But these should not be a deterrent to looking into a company further. Many a times companies pay low dividends or no dividends bcos the business is capable of deploying high doses of capital which generates high returns on deployed capital. And in some cases like kaveri seeds, bcos of their status as agrichem cos they dont need to pay taxes.
Two important parameters to look at are cash flows and working capital situation. Progressive deterioration in either or both of the above would be first sign of trouble.
Cyclicals with loads of debt and still expanding would often turn out to be value traps.
Consistently increasing debt and frequent equity dilutions also are red flags to be followed further.
Serial acquisitions with a poor past history of the same should also be a warning sign.
Promoter antics are often indicative of future problems.
I usually go by the business quality and management quality checklists esp for the long term bets. We have whole well opinionated and populated threads on both these aspects so no need to elaborate.
Having said all of the above, most of our multibaggers began as value buys which later on turned into great growth stories and this facilitated huge reratings in such companies. So one has to learn to differentiate between value traps and real value.
For me value traps have been companies like unity infra, lakshmi energy, etc where the tell tale signal were clearly visible but I was not educated enough to heed the warning signs.