Finding the Red Flags

As you probably know by now, companies love hiding their dirty laundry in the small print of the notes to the financial statements. As you read through the notes, keep an eye out for possible red flags.

Whenever you see notes titled "Restructuring," "Discontinued operations," and "Accounting changes," look for red flags that could mean continuing expenses for a number of years. The company will detail the costs of any of these changes. Be sure to consider long-term financial impacts that could be a drain on the company's future earnings — which may mean stock prices will suffer.

(ftNG/ Also be on the lookout for potential lawsuits that could result in huge settlements. If you see that a lawsuit has been filed against the company, search for stories in the financial press that discuss the lawsuit in greater detail than what's included in the notes.

Significant events aren't the only things that can raise red flags. You may also see signs of trouble in the way that the company values assets or in decisions it makes to change accounting policies. The notes involving the long-term obligations the company has to its retirees may also be a good spot to find some potential red flags.

The financial press often mentions red flags that analysts spot in companies' financial reports. Read the financial press to pick up the potential problem spots and look for the details in the financial statements and the notes to those statements.

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