Nakit Akim Tablosuna Ait Uyarılar

 

1 - Net Income Negative

Starting at the top of the cash flow statement, when net income is negative, it indicates the company is not generating a profit from its sales.

While a business can continue to operate by using the cash on its balance sheet, issuing more shares, or borrowing money, none of those are good long-term options.

2- Stock-Based Compensation More Than 10% of Net Income

Stock-based compensation is a way companies can reward employees without paying more in salary.

The benefits are that it aligns employees with the company’s goals.

It can be especially helpful for young, growing companies that might not yet generate much free cash flow.

The downside is that it dilutes the ownership stake of existing shareholders.

When stock-based compensation reaches 10% of net income, investors need to recognize they are being seriously diluted by management!

3 - Operating Cash Flow Lower Than Net Income

Operating cash flow is critically important for investors to understand.

The graphic above shows that operating cash flow is calculated by starting with net income and adding back non-cash charges like depreciation, amortization, and stock-based compensation.

Operating cash flow should always be larger than net income.

When this number is significantly lower than net income, it can signal troubling signs, such as unsold inventory.

4 - Free Cash Flow Lower Than Net Income

Free cash flow represents how much cash the business generates from its operations minus the cost of capital expenditures.

It’s a great sign when free cash flow exceeds net income; that means the company generates cash as it grows.

5 - Capital Expenditures More Than 25% of Net Income

Few great companies need to reinvest significant profits into the business to grow. It’s a great sign when capital expenditures are consistently less than 25% of net income.

Capital expenditures are a great way to fuel business growth, such as building new factories or upgrading stores.

But when these charges are excessive, it could mean that the company is overspending.

6 - Debt Increasing

Great companies don't need debt to fund themselves, especially in an environment of high interest rates.

Look for companies reducing their debt load, not increasing it.

7 - Stock Offering

Stock issuance isn't a shareholder-friendly move. Like stock-based compensation, it dilutes existing shareholders.

Great companies reward shareholders by returning capital via dividends and buybacks, not punish them by issuing more shares.

8 - Cash Balance Declining

When the change in cash balance is negative over a period, it could signal that management is not spending money wisely or that the business is struggling.

It’s a wonderful sign when companies pay for capital expenditures, reduce debt, repurchase shares, pay dividends, and still see the cash balance increase at the end of the quarter.

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As always, it is essential to remember these are yellow flags, not immediate reasons to sell a stock.

Think of each yellow flag as a dashboard indicator on your car. When a light goes off, you know something under the hood requires more attention, not that the car needs to be immediately replaced.

Netflix’s free cash flow was consistently negative for years, even as it showed positive net income.

Even after the streaming service finally went free cash flow positive, it significantly lagged its net income.

İş Modeline Ait Uyarılar

 

1 - Declining market share

If a competitor is growing much faster than your business, it’s a sign that any competitive advantage the company once had is eroding. Reasons could include competitors having a greater value, higher quality product, better business model, or more skilled management team.

2 - Stops sharing a key metric

Some management teams like to hide bad news and only highlight good news, so pay close attention when specific metrics stop being disclosed.

Depending on the company, these figures can range from the number of widgets sold to same-store sales to new subscribers.

When a company has historically reported a specific key performance indicator but suddenly stops, it is almost always a sign of a troubling trend.

3 - Brand dilution

A brand is a company’s identity in the mind of its customers. A company’s brand can help distinguish itself from competitors and, when done right, can become its economic moat.

While this takes time and effort, it is relatively easy for companies to destroy this work in a short amount of time.

Here are several examples of actions that might dilute brand power:

• A luxury company that begins selling products in discount stores.
• A streaming platform that begins producing more content noticeably inferior to past work.
• A company that begins to rapidly raise prices to extract as much profits from customers as it can.

These examples can lead to immediate revenue growth but at the cost of its customers’ love and loyalty. That’s not a formula for long-term success.

4 - Major acquisition

When a company makes a big acquisition or completes a merger, we sometimes say the business is “buying growth.”

This refers to the situation where a company is having difficulty growing through its existing products and services, so it turns to acquisitions to artificially boost the top line.

Additionally, acquisitions can distract management, consume resources, hurt the balance sheet, irritate employees, and significantly change the investment thesis.

5 - Surprise key executive departure

Leadership transitions are difficult even when they are planned and coordinated. If a high-ranking executive jumps ship or is shown the door, it could be a sign that something is wrong with the business.

6 - Abrupt change in auditors

A sudden change in auditors can be a significant yellow flag. It may indicate disagreements between the company and its previous auditors on accounting practices or other financial reporting issues.

This unexpected change can create uncertainty about the company’s financial integrity and potentially reveal deeper problems within the business.

Some English

 

11 mayıs

Gelir Tablosunda Dikkat Edilmesi Gerekenler

 

1 - Revenue growth declining rapidly

Revenue is the engine that powers everything else in the company. Which direction a company’s top line is moving is extremely important to every other number downstream of revenue on the income statement.

When growth suddenly slows, it’s essential to understand why the company is selling fewer products or booking its services less.

Rule of thumb: Revenue growth will slow as a business matures, but the decline will typically be gradual. When it’s sudden, it usually indicates something is wrong.

2 - Gross margin declining

Gross margin might be the most important metric of a company’s financial performance. It is essentially the money that the company keeps after subtracting out the direct costs associated with producing its goods and/or providing its services.

When gross margin declines, it means a business is keeping less of its sales either because production costs have increased or it is charging less to its customers.

Small changes in gross margin can quickly add up to big changes in earnings, so watch this number carefully!

Rule of thumb: When gross margin declines, it could be a sign that the company does not have pricing power with customers or bargaining power with suppliers.

3 - Sales and marketing rising faster than revenue

Importantly, this refers to sales and marketing as a percentage of revenue, not on an absolute basis.

As a company gets larger, it should the company should be able to spend less on sales and marketing in relation to its overall revenue. If a company must spend more and more to keep attracting customers, that’s not a good sign.

Rule of thumb: Marketing costs should scale with the company as it grows.

4 - Goodwill write-downs

This happens when management recognizes it overpaid for an acquisition, essentially saying it destroyed shareholder value.

The size of the write-down relative to the acquiring company matters a great deal.

In 2015, Microsoft took an impairment charge of $7.6 billion for its Nokia acquisition. That was nearly the total amount it paid to acquire Nokia’s smartphone business! While that’s a huge sum, compared to Microsoft’s approximate $350 billion market cap at the time, it was a relatively minor blunder.

For smaller companies, the write-down could be less in absolute dollar terms but matter much more.

Rule of thumb: Goodwill write-downs are a black eye on a company’s financials and an admission that management destroyed shareholder capital.

5 - Excessive share dilution

Stock-based compensation can be a great way for companies to align employee incentives with the company’s goals without burning cash. This is especially important for young companies that are still growing fast but are not yet profitable.

However, the practice can be easily abused, too. Share dilution hurts shareholders as their stakes represent a lower percentage of company ownership.

So, how can you tell when stock-based compensation crosses the threshold from being a smart practice to excessive?

Rule of thumb: When a company grows revenue quickly (>25%), we’re okay with up to 3% annual dilution. When a company’s revenue growth slows to 10% or less, we want share dilution to be under 1%.

6 - Tax rate consistently lower than its home country’s corporate tax rate

If a company works hard to lower its tax rate, it could reveal a culture that works hard at deception. Be careful because the same company could also be working hard to deceive shareholders.

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As with the balance sheet’s yellow flags, these flags signal caution.

Just as when your car’s dashboard flashes a check engine light, it could indicate a minor or a major issue. The driver’s primary takeaway should be that something under the hood requires attention.

In some cases, when a company exhibited one or more of these yellow flags, shareholders were rewarded with outperformance for holding onto their shares as the company worked through its issues.

Accounting is the language of business, but it is filled with nuance. There are very few set rules that require prudent investors to buy or sell immediately.

Instead, these yellow flags on a company’s income statement should signal the investor that it’s time to look under the hood.

Bilançolarda Dikkat Edilmesi Gerekenler

 

Yellow Flag #1 - Cash & cash equivalents less than total debt

Harold Geneen, a famous business leader, once said, "The only unforgivable sin in business is to run out of cash." Cash gives companies flexibility. It gives them options. Debt takes that away. It makes them fragile.

Yellow Flag #2 - Accounts receivable rising faster than revenue

Accounts receivable are funds customers owe for products and services they have already received. If accounts receivable start rising faster than revenue, it could indicate that its customers are having difficulties paying their bills. This is especially something to watch when a company has high customer concentration or operates in a cyclical industry.

Yellow Flag #3 - Inventory rising faster than profits

Inventory refers to the value of products the company has manufactured and is ready to sell but has not yet sold. It can also include the value of subcomponents not yet built into a finished product. As inventory rises, profits should generally rise too.

For instance, if a retailer opens more stores, inventory and profits should rise. However, if inventory is rising without a commensurate increase in earnings, it could mean the company is struggling to sell the merchandise on its shelves.

Yellow Flag #4 - Short-Term + Long-Term Debt Is More Than Cash

As shareholders, we want to invest in antifragile companies with enough cash to meet their financial obligations for the foreseeable future.

Yellow Flag #5 - Goodwill is more than 50% of total assets

Goodwill is the premium that one company pays to acquire another company.

If goodwill exceeds 50%, a company may have purchased other companies to boost its top line. This practice could hide a company's challenges in producing organic growth (e.g., through its existing products and services).

Yellow Flag #6 - Intangibles > 50% of total assets

Investors should want a company's balance sheet loaded with liquid or usable assets, such as cash, factories, and property. Companies with primarily intangible assets can have assets, such as goodwill, that cannot be used to capture future returns.

Yellow Flag #7 - A company has preferred stock

Preferred stock is a class of stock with a higher claim to dividends and asset payouts than common stock shareholders. There are some benefits, but it is often more expensive than debt over the long term.

Yellow Flag #8 - Retained earnings are a negative number

Retained earnings are the cumulative profits companies have generated since their founding (minus losses, dividends, and share buybacks). When this number is negative, it could show that a company is unprofitable.

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It’s important to note that these are yellow flags representing caution.

They are not necessarily signals to sell or avoid stocks that exhibit these flags.

When you’re driving your car, and the dashboard’s check engine light flashes on, do you immediately go to the dealership and trade your vehicle in? No, of course not!

You take it to a mechanic or, if you know how to work on cars, pop the hood up to look things over yourself.

In the same way, the balance sheet’s yellow flags represent caution, a signal that more investigation is required, but are not, in and of themselves, an immediate reason to sell a stock.

In fact, in some cases, shareholders were rewarded considerably for holding through these yellow flags.

For example, Home Depot has negative retained earnings. But once you investigate the matter further, you realize it’s only because the home improvement retail giant has been aggressively buying back stock and paying dividends for years.

Because both of these things reduce retained earnings, Home Depot’s retained earnings have gone negative.

There can also be good reasons for companies to hold less cash than debt, issue preferred stock, show rising inventories, or have many intangible assets.

Accounting is the language of business, but it’s a language of nuance and subtlety. The primary takeaway of any of these yellow flags spotted on a company’s balance sheet is that more investigation is required.