Lesson 4 of 4 · 8 min read
Spotting red flags
Now that you understand figures, moat and valuation, you'll learn to see the warning signs before you buy in.
Debt spiraling out of control
A bit of debt is normal and even smart. But if debt grows much faster than profit, a company becomes vulnerable: with rising interest rates or a setback, it can get into trouble. Check whether the company can easily pay its interest out of profit.
Stocky says
Compare debt with operating profit. If a company would need years of all its profit to pay off the debt, be careful.
Profit yes, cash no
Profit on paper is not the same as money in the bank. If a company keeps reporting 'profit' but free cash flow stays negative, something is wrong. Cash lies less easily than accounting profit.
Did you know?
Many accounting scandals began with companies showing growing profit while the real cash was drying up.
Dilution: your slice shrinks
If a company keeps issuing new shares (for example to pay staff), your slice of the pie gets smaller — even if the price doesn't change. Check whether the number of shares outstanding rises sharply year after year.
In practice
If you own 1 of 100 shares (1%) and the company issues 100 more, you now own only 1 of 200 (0.5%) — you've been 'diluted'.
Everything hangs on one thing
One product, one big customer, one market or one charismatic CEO: concentration is risk. If that one pillar falls away, the whole company wobbles. Diversification within a company makes it more robust — just like diversification in your portfolio.
Combine the signals
One red flag is not a disaster — almost every company has something. It's about the overall picture: lots of debt and falling cash and heavy dilution together is a clear stop sign. Your prior knowledge of figures, margins and moats now lets you form a well-founded judgment yourself.
Remember this
- Debt that grows much faster than profit makes a company vulnerable.
- Profit on paper without positive free cash flow is a warning sign — cash lies less.
- Constantly issuing new shares dilutes your slice of the company.
- Dependence on one product, customer or CEO is concentration risk; watch the overall picture.
There is a quiz for this lesson
3 questions that check whether it stuck. They live in the app, because a quiz nobody grades teaches nothing.
Want to practise, not just read?
Stockedin teaches investing in short lessons, with €10,000 in demo money to make your mistakes with. Stocky, the AI coach, explains anything you get stuck on.