The warning signs

Companies in trouble rarely warn you. But their accounts often flash months in advance.

Four signs almost always come back. Alone, they prove nothing. Together, they should stop you.

First sign: profit without cash. The income statement says you are earning, cash says you are losing.

One year, it happens: a big customer paying late, an investment. Three years in a row, it is a warning.

Because profit depends on accounting choices. Money coming into the bank cannot be argued with.

Second sign: swelling stock. The company produces faster than it sells.

Say sales up five per cent in a year, and stock up forty per cent.

These products are not sold. They go out of fashion, get damaged, and may have to be sold off cheap later.

Worse: while they sit in stock, their cost does not appear in expenses. Profit looks better than it is.

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Third sign: receivables getting longer. Customers take more and more time to pay.

A company sells three million six hundred and fifty thousand euros a year. Ten thousand euros a day.

Its customers owe it four hundred and fifty thousand euros: forty-five days of sales. That is a normal delay.

The next year, they owe it nine hundred thousand euros. Ninety days. Sales have not moved.

Either customers are struggling, or the company sells to anyone to inflate its revenue. Either way, danger.

Fourth sign, more discreet: dilution. The number of shares rises every year.

A company earns fifty million, shared among one hundred million shares. Fifty cents per share.

The next year, its profit rises five per cent. Good news? But it has issued ten million new shares.

Fifty-two and a half million, divided by one hundred and ten million shares. Less than forty-eight cents per share is left.

The company has grown, but your share has shrunk. The cake gets bigger, your slice gets smaller.

The twist: none of these signs is hidden. They are in the published accounts, for all to see.

What is missing is rarely the information. It is the will to look when the story being told is a nice one.

Four simple checks. Does cash follow profit? Does stock follow sales?

Do customers pay as fast as before? And does the number of shares stay stable?

A single sign is a question. Two or three together are an answer.