Hi all,
speaking from experience, here are some other red flags
- Continuous CAPEX. Any business that needs to keep investing to grow revenue is a self defeating cycle on the return of capital front. Its also a easy way to channel money out of the system.
- Low promoter salary. Do not for even a minute think the promoter is some magnanimous fellow who is working his butt off for you at a pittance. If the salary is low, means he is earning elsewhere
- Promoter owning another entity in a similar line of business. Do I need to elaborate this ?
- Increasing promoter pledge. If I was running a company in which I own a fraction, why would I pledge my shares for the benefit of the company. Also, ask the question how will the pledge be unwound ? Unless the promoter sells some of his free shares in the open market, there is no way to clear the pledged shares from the encumberance.
- Low dividend to EPS ratio. If the cash is real, most of it should get paid out to shareholders. Reinvesting in growth , etc is a good smokescreen promoters use. See through it.
- Too many acquisitions/equity dilutions. these tend to muddle the waters and prevent analysts/ investors to compare performance on a straight line basis. some promoters acquire companies only to confuse people tracking it.
- Stock splits. No benefit to anyone other than to confuse the average investor on the cheapness of the stock. The situation is now so bad that you hardly get any meaningful EPS from any company…most are like 1.12, 0.98 , etc for the quarter. Any company with any meaningful EPS is now priced over a 1000 bucks. think about it.