[Red flags] How to Analyse a Stock / Company before Investing | Stock Analysis - YouTube

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in today's video, after saying thank you to all, let's proceed to today's topic

Today's topic is how can you identify the 5 red flags and get yourself saved from investing in a bad company?

Friends, everyone tells you how to choose a good company

on which even I would have made videos but it is very important to identify a bad company for investing

because if you invest in a bad company then

there are many behavioral biases which will create problems in exiting a company

So the most important thing before choosing a company is to identify these red flags

I won't say that 100% you will be able to avoid a bad company but you will start having some doubts

even if you identify a single red flag in any of the company

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because we upload 3 to 4 educational videos which help you become a good investor

Let's start with today's video and discuss how to identify 5 red flags

which can save you from investing in a bad company

Let's start with the first red flag

The first red flag is related to a company's debt and its liquidity

Now how can you identify them and how do these two things matter in your investment?

Now if I start with debt, then you might know that when a company takes money from a third party

in order to expand its business or meet its requirement, it had to pay interest on its debt

It is said that debt is very important for any company's expansion but it should be taken in a limit

Friends, now the question here is what is the applicable favorable limit of debt in any company?

this question cant be answered by an expert or analyst. This decision as an analyst you will have to take

I can give you small tips to identify if the debt level is appropriate for the company or not

The debt level is different for every industry

in some industries, it's possible that a debt level, debt to equity level of 0.1 is also considered high

In some industries, even ratio of 1 in debt to equity is considered low

If you are analyzing debt to equity ratio of a company in comparison with its industry, if its appropriate or not

then pick 5 to 7 competitors of the company and take out the average debt to equity ratio

Compare it to figure out if a company's debt-equity ratio is higher or lower according to the industry

Normally it is considered if the debt to equity ratio is lesser than the industry then it is ok

otherwise, it's not okay

One more parameter can be analyzed in debt's comparison

If a company is taking a debt, What is the reason behind it

Company is doing it to expand its business if its revenue growth and profits are increasing

then it seems right that the business took debt to expand itself

Now assume if a company took debt in the last quarter and its revenue and profit are not increasing

and in the next quarter, the company took more debt

cause of which the company's revenue and debt didn't increase by much

If you feel that the revenue and the profit of a company is not growing well but its debt is increasing continously

in such a case you should be awry and consider it as a red flag and stay away from such companies

if still, you want to invest, then at least you should go for a deeper analysis

then you should decide whether you want to invest or not

Friends, another thing which is as important as debt is liquidity

What is liquidity?

Liquidity means how much money does the company have which it can convert into cash in the short term

Liquidity is important for any company's operations

You can look at a company's cash flow, operations

Normally you should see that the company's cash flow is positive not negative

One more important measure to analyze liquidity is debtors cycle

Now what is this debtors cycle and what does it indicate?

Now say I own a company which manufactures shoes for distributors

Now if the liquidity of the company is good then I will have more cash and I can manufacture more

Now how can the liquidity get better? Say if I am manufacturing shoes to supply it to my distributors

and my distributors pay me my amount in 5 days

Now debtors cycle tells you in how many days the distributors return the money on an average

Now consider that the company's debtor cycle is long and it takes a long time for the money to be paid then

then, in that case, the company can experience a liquidity crunch

when there is a liquidity crunch in a company, the production of the company gets impacted

and to reduce that liquidity crunch, the company creates more debt

and you know how dangerous it is for any company to take debt

Let's talk about the second red flag which is related to promoters holdings

Friends, you might know a company's promoter holding can be figured out from any related website

which tells you how much of the ownership is being held by the promoters in the company

In the industry, if the promotor holding of a company is continuously increasing it is considered to be a positive

point but to only invest on this basis would be wrong

There is a major red flag in the case of promotor holding which you must concentrate on

There is a thing called promotor pledging which tells you how much of its share is loaned out by the promotor

Now from here, we can understand that if the promotor needs money

he can loan out his share in the company and get money

Friends if in any company the promotor holding in pledge is increasing continously

It can be a red flag for you and you must further investigate that the shares pledged by the promotors

is for what time period and how is he going to utilize that money for if the pledge is continuously increasing

then after considering it a red flag and doing further analysis only you should think of investing in a company

Other than this if the company's promotor holding is decreasing at an increasing rate

that means promotor is exiting from the company and even, in that case, you must do a deeper analysis

on the cause of the problem for which the promotor is exiting

Friends, there are some regulatory compliance due to which promotor has to decrease its holdings

so you can overlook those cases so you must analyse on why the promotor decreased his holdings

what is the reason given behind it

You should do a deeper analysis in such a case and if you find justification for this situation then

If promotor reduced his holding or pledged it due to compliance or any other genuine reason then it is ok

If that is not the case, then you must do a further analysis after considering it a red flag

Let's talk about the third red flag which is very important if you are planning on investing in a lending institution

This red flags name is NPA which tells you about Non Performing Assets

I would have told you its definition in every banking video

NPA tells you that if you have lent Rs.100 then how much money would become a bad debt there

This tells you asset quality in a particular bank's lending

which means if a bank has invested at a place, then what are the chances that it will be returned

Recently, NPA has started to be considered very important because assume if a bank is lending out

aggressively and growing aggressively then you might feel the need to invest there

A bank's core income comes from the interest in the invested amount

Now assume if the bank has stopped receiving interest as well as the bank's money is also not getting returned

then you can imagine the pressure on the bank

cause of which NPA should be an important red flag for you

If any banking institute's NPA is growing at an increasing rate

like in the case of Yes bank when it was trading at Rs.300

its NPA was continuously increasing as its asset quality wasn't good

cause of which there was a downfall because of which retail investors faced a huge loss

thus in the banking sector, NPA is very important.

Before investing in any bank, you must go through its past records and where it has lent its money

how much money is in corporate and retail

it is normally considered that the bank which has more investment in retail has lesser NPA

and by investing in corporate the NPA increases

take these things into consideration and analyse deeply before investing in any banking sector institutions

If the NPA is increasing continuously then consider it a red flag and avoid such institutions

Friends, let's talk about the fourth parameter

Assume if a company's last quarter's result was very good

its profit has increased heavily, in such cases people think they should invest in such companies

cause in the recent quarter its result was very good

If you are looking at the quarterly results of a company and analyzing then look at the past 3 years results

If you are looking at one quarter's results then if you are looking 2021's last quarter results

then you must compare it with the same quarter of last year

Say if I looked at March's result then I can compare it with December results

but there are many companies with seasonal businesses

Now assume there is a company which gets huge sales in March and if you compare it with December

You won't be able to see a true picture and while analyzing any quarter's results

Say, for example, you are analyzing the result of March 2020 then compare it with March 2019

so that you can counterbalance the seasonality in any business and get a true picture on the earnings

While analyzing the earning, check the operating profit margin really well

and do not invest in any company on the basis of profit

It might happen that the revenue of a company grew really well but its operating profit margin was not good

in that case, there might be some serious issues with the company.

Now here if I give you an example, you might have heard of Ruchi Soya

we had done a case study on it and we have mentioned the link in the description if you want to see it

When Ruchi Soya got listed after getting delisted once, the red flag one saw before going to NCRT

was that the company's revenue was growing fine but the company's operating profit was very low at 2 to 3%

If you are planning to invest in a company with a decreasing operating profit

then it should act as a red flag for you which you should analyze deeply before investing

Friends, let's talk about the last red flag

you might know how important quarterly and annual results are for a company

as it tells the shareholder about the performance of a company

In some cases company starts delaying its quarterly and annual results and if you are thinking of investing

and you see that the company is, again and again, delaying its annual results

even it can act as a red flag

cause if you pick out a good company and see, you will notice that they never delayed their annual results

Just after their board meeting, you receive their annual reports

You should notice before investing in a company on whether they are publishing their annual results on time

other than this, accounting policies are very tough which can change your profit & loss in many ways

so if you read the annual reports of a company really well then

you should know which accounting policies the company is using

and in which way the company is recognizing their revenue and expense

Now, assume if a company is changing its accounting policies frequently in order to show more profit

then considering it as a red flag, you should stay away from such companies

How a company uses its accounting policies can be seen in its annual reports

Below the annual report, you can see the accounting policies in detail wherein they tell you

on what are their revenue recognition policies, depreciation policies, accounting policies in the company

you should check it out thoroughly in detail

If a company is changing its accounting policies frequently and delaying its quarterly results

then it should consider it a red flag and a deeper analysis should be made

Friends, today video was completely for educational purpose

If we have taken any company's name in the video as an example, it is only for educational purpose

We do not recommend on buying and selling in any company

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Comment and tell us which red flag have you used before and which companies come under that red flag

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