GuruFocus’ Warning Signs, a Premium feature, helps users avoid overlooking potential red flags about a company’s financial strength, profitability, valuation and growth.
Figure 1 illustrates a sample stock summary header page for International Business Machines Corp. (IBM).
Figure 1
As Figure 1 illustrates, the top-left section of the summary page contains a few bars indicating the number of severe warning signs, medium warning signs and positive investing signs. Users can click on the “Warning Signs” item on the Navigation Bar to view a summary of the company’s warning signs as Figure 2 illustrates.
Figure 2
As Figure 2 illustrates, the warning signs are categorized as severe, medium or good.
Severe Warning Signs:
Financial Strength: Poor
Company displays poor financial strength. Usually, this is due to high amount of debt.
Altman Z-Score: Distress
Company Altman Z-score is in distress zone. This usually implies a high risk of financial distress.
Piotroski F-Score: Low
Company Piotroski F-score is low, which may signal poor business operation.
Beneish M-Score: Possible manipulator
Company Beneish M-score is less than -1.78, which may signal possible earnings manipulation.
Sloan Ratio: Poor quality of earnings
If Sloan Ratio is higher than 25% or lower than -25%, earnings may likely consist of accruals.
Interest Coverage: Extremely low
Ben Graham prefers interest coverage to be at least 5. Company’s earnings cannot cover its interest expense. If the situation continues, company may need to issue more debt.
Revenue per Share: Declined
Company’s revenue per share has been in decline for more than five years.
Gross Margin %: Declined
Company’s gross margin has been in long-term decline.
Operating Margin %: Declined
Company’s operating margin has been in five-year decline.
Operating Income: Loss over past three years
Company has not been profitable over the past three years. It reported operating loss each year.
Asset Growth: Faster than revenue growth
If a company’s asset growth is faster than revenue growth over the past five years, then the company may be getting less efficient.
Days Sales Outstanding: Building up
If a company’s sales outstanding increases, it means it has having difficulty collecting payments from customers.
Days Inventory: Building up
If a company builds inventory, it may mean it is having difficulty selling its goods.
Long-term debt: Keep issuing new debt
Company keeps issuing new debt. Over the past three years, company has issued (fill in the blank) in new debt.
Medium Warning Signs:
Altman Z-Score: Grey
Company Altman Z-score is in gray area. If the score drops below 1.81, the company faces financial distress risk.
Interest Coverage: Low
Ben Graham prefers interest coverage to be at least 5. Company’s interest coverage is low.
Dividend Payout Ratio: Too high
If a company’s dividend payout ratio is too high, its dividend may not be sustainable. Company’s dividend payout ratio is a little too high.
Dividend Payout Ratio: Dividend not sustainable
Company’s dividend may not be sustainable.
Revenue per Share: Declined
Company’s revenue has declined over the past few years.
Revenue per Share: Growth slows down
Company’s revenue has decelerated over the past 12 months.
Dividend Yield %: Close to Low
Company’s dividend yield is close to a multiyear low.
Price: Close to 1 or 2 or 3 or 5 or 10-year High
Company’s price is near a 1, 2, 3, 5 or 10-year high.
PE Ratio: Close to 1 or 2 or 3 or 5 or 10-year High
Company’s price-earnings ratio is near a multiyear high.
PB Ratio: Close to 1 or 2 or 3 or 5 or 10-year High
Company’s price-book ratio is near a multiyear high.
PS Ratio: Close to 1 or 2 or 3 or 5 or 10-year High
Company’s price-sales ratio is near a multiyear high.
Long-Term Debt: Issuing new debt
Company has issued new debt over the past few years. However, its debt situation is still acceptable.
Net Issuance of Stock: Keep issuing new shares
Company keeps issuing new shares, which may result in dilution of existing shares. Company may have difficulty maintaining financial solvency.
Stock buyback: Poor buyback track record
Company has bought back shares. However, the shares are now trading below the buyback price.
Operating Income: Loss
Company has reported operating loss over the past few years.
Valuation: Forward PE Ratio
Company's forward price-earnings ratio is greater than its trailing-12-month price-earnings ratio. This suggests declining earnings.
Tax Rate: Too Low
Company seems to pay lower taxes, which may boost earnings. However, the earnings may not be sustainable.
ROIC vs WACC: ROIC < WACC
Company’s ROIC is less than its WACC. It may not be capital efficient.
Insider Sell: Insider Selling
There were (fill in the blank) insider selling transactions and no insider buying over the past three months. (Fill in the blank) shares were sold.
Good Signs:
Financial Strength: Strong Financial Strength
Company has strong financial strength.
Altman Z-Score: Strong
Company’s Altman Z-score is strong.
Piotroski F-Score: High
Company’s Piotroski F-score is high, suggesting good business operation.
Beneish M-Score: Unlikely manipulator
Company’s Beneish M-score is no higher than -1.78, which implies that the company is unlikely a manipulator.
Interest Coverage: Comfortable
Ben Graham prefers interest coverage to be at least 5. Company has enough cash to cover its debt. Its financial situation is stable.
Revenue per Share: Consistent growth
Company has shown predictable revenue and earnings growth.
Operating Margin %: Expansion
Company’s operating margin is expanding. Margin expansion is usually a good sign.
Dividend Yield %: Close to High
Company’s dividend yield is close to a multiyear high.
Price: Close to 1 or 2 or 3 or 5 or 10-year Low
Company’s price is near a 1, 2, 3, 5 or 10-year low.
PE Ratio: Close to 1 or 2 or 3 or 5 or 10-year Low
Company’s price-earnings ratio is near a multiyear low.
PB Ratio: Close to 1 or 2 or 3 or 5 or 10-year Low
Company’s price-book ratio is near a multiyear low.
PS Ratio: Close to 1 or 2 or 3 or 5 or 10-year Low
Company’s price-sales ratio is near a multiyear low.
Insider Buy: Insider Buying
There were (fill in the blank) insider buys over the past three months. The total number of shares bought is (fill in the blank).
View warning signs for a specific company
Click on the “IBM’s Warning Signs” link to view a more detailed overview of the warning signs. Figure 3 illustrates a sample of the Analysis -> Warning Signs page.
Figure 3
As Figure 3 illustrates, the Analysis -> Warning Signs page gives a detailed description of each warning sign. For example, IBM’s severe warning signs include declining operating margins and revenue over the past five years as the following charts illustrate.
You can also screen based on the number of warning signs
Users can also screen based on the number of good signs and warning signs using the All-in-One Screener, a Premium feature of GuruFocus. Figure 4 illustrates an example of the “Warning Signs” Screener filters.
Figure 4
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