At a Glance
Before you part with your hard-earned ₹, check these 20 screaming 🚩 red flags. We’ll break each down in simple terms, show you real-world examples, and give you quick “spot-it” hacks. Follow this guide and avoid turning your portfolio into a horror show.

Why You Need This Checklist

• Prevent Rookie Mistakes: Even seasoned pros get burned when they ignore warning signs.
• Save Time & Money: Spot trouble fast and move on to greener pastures.
• Invest with Confidence: Knowing what to watch for is half the battle.

The 20 🚩 Red Flags Explained (with Examples!)

1. 🕵️‍♂️ Opaque Footnotes & Legalese

• What to Look For: Pages of dense footnotes hiding key figures (debt, one-offs).
• Example: “XYZ Textiles” reported ₹200 cr revenue, but buried a ₹50 cr related-party loan in footnote 23.
• Spot-It Hack: Flip to the last 10 pages of the annual report. If you need a PhD to understand them, beware.

2. 🤹‍♀️ Pro-Forma Acrobatics

• What to Look For: “Adjusted EBITDA” that excludes the same expenses every quarter.
• Example: “ABC Infra” removes ₹30 cr in “one-time restructuring costs”… every single year.
• Why It Stinks: They’re making losses disappear like a magician’s rabbit.
• Spot-It Hack: Compare GAAP net profit vs. pro-forma profit—big gaps mean big questions.

3. 🔄 Auditor & CFO Musical Chairs

• What to Look For: Auditor or CFO replaced year after year, “for personal reasons.”
• Example: “123 Pharma” has had three auditors in five years—and none lasted 18 months.
• Why It Stinks: People don’t quit good jobs unless the water’s boiling.
• Spot-It Hack: Check “Corporate Governance” section for auditor tenure; note any abrupt “resignations.”

4. 🤝 Related-Party Shenanigans

• What to Look For: Large contracts with sister companies or promoters’ families.
• Example: “MNO Fabrics” sold fabric to “MNO Textiles Pvt Ltd” (promoter’s firm) at ₹5/kg vs. ₹8/kg market price.
• Why It Stinks: It’s insider trading by another name—profits get funneled away.
• Spot-It Hack: Scan “Related Party Transactions” table; huge numbers there are a red flag.

5. 💰 Debt Volcano

• What to Look For: Debt shoots up while interest-coverage ratio plunges below 2x.
• Example: “DEF Energy” debt doubled to ₹1,200 cr, but interest coverage fell to 1.2x.
• Why It Stinks: One rate hike or earnings miss and the volcano erupts—hello bankruptcy.
• Spot-It Hack: Plot debt vs. EBITDA for the past 5 years; steep debt growth is scary.

6. 📉 Shrinking Margins, Hype-Squad Sales

• What to Look For: Revenue growth but gross margin dropping from 30% to 15%.
• Example: “GHI Foods” sales up 20%, but GM halved because they slashed prices.
• Why It Stinks: They’re buying growth with discounts—margins evaporate, loyalty disappears.
• Spot-It Hack: Chart margin% over time; if it’s sliding downhill, flag it.

7. 🏭 Inventory & A/R Pile-Up

• What to Look For: Inventory days rising from 60 to 180 days; receivables aging 90+ days.
• Example: “JKL Plastics” had ₹300 cr inventory sitting unsold for 9 months.
• Why It Stinks: Cash is tied up in warehouses and uncollected invoices—not in your pocket.
• Spot-It Hack: Compare “Inventory Days” and “Receivables Days” YoY; big jumps spell trouble.

8. 🎯 Over-Dependent on One Client

• What to Look For: Top customer contributes >40% of revenue.
• Example: “PQR Auto Parts” sells 50% of output to a single carmaker.
• Why It Stinks: Lose that client, and you’re in freefall.
• Spot-It Hack: Glance at “Customer Concentration” in MD&A; anything >30% gets you thinking twice.

9. 🔥 Discount Fire Sale

• What to Look For: Growth fueled by heavy discounts, freebies, 0% financing.
• Example: “STU Appliances” offered 50% off flash sales every quarter.
• Why It Stinks: You’re buying top-line growth, not real profitability or brand loyalty.
• Spot-It Hack: Read marketing spend vs. revenue; if spend is rising faster, margins will shrink.

10. 💸 Negative Free Cash Flow Marathon

• What to Look For: Free cash flow negative for 3+ years, despite profits.
• Example: “VWX Tech” showed ₹100 cr profit but burnt ₹50 cr in cash each year.
• Why It Stinks: Earnings are just numbers; cash pays bills.
• Spot-It Hack: Compare net profit to operating cash flow—large gaps mean phantom earnings.

11. 📊 Management Guidance Flip-Flops

• What to Look For: Target revisions up and down every few months.
• Example: “YZA Realty” cut guidance 3 times in 6 months, then hiked it again.
• Why It Stinks: If they can’t forecast a straight line, how can you?
• Spot-It Hack: Track past guidance vs. actuals—consistent misses are a warning.

12. 🏗️ Capex Splurge Without ROI

• What to Look For: Big capex pushes, but return on capital stuck at 5%.
• Example: “BCD Steel” spent ₹500 cr on a new plant that operates at 40% capacity.
• Why It Stinks: Vanity projects drain cash; real growth shows in better returns.
• Spot-It Hack: Check ROCE trends alongside capex—if ROCE falls, question it.

13. 🔒 Insider Selling Spree

• What to Look For: Promoters or top execs consistently offloading shares.
• Example: CFO of “EFG Pharma” sold ₹20 cr worth of shares last quarter.
• Why It Stinks: They know the business inside-out. If they’re running away, ask why.
• Spot-It Hack: Monitor insider-trading filings on BSE/NSE; regular selling is ominous.

14. 🛠️ Overly Complex Business Model

• What to Look For: Multiple SPVs, offshore entities, web of subsidiaries.
• Example: “HIJ Holdings” owns 5 foreign SPVs, each with separate loans.
• Why It Stinks: Complexity hides risk—simpler competitors win trust.
• Spot-It Hack: Draw a flowchart of their structure; if it looks like spaghetti, step back.

15. 🔍 Regulatory Crosshair

• What to Look For: SEBI/CBI inquiries, fines, or show-cause notices.
• Example: “KLM Capital” under SEBI probe for alleged insider trading.
• Why It Stinks: Legal battles bleed cash and reputation.
• Spot-It Hack: Search news archives for regulatory actions; no news is good news.

16. 📈 Unreasonably Smooth Growth

• What to Look For: Steady 20% YoY growth through cycles.
• Example: “NOP Foods” posted exactly 20% growth every quarter for 5 years.
• Why It Stinks: Markets fluctuate. Perfect smoothness smells fishy.
• Spot-It Hack: Plot quarterly growth—airplane-smooth curves are unnatural.

17. 🧮 Accounting “Errors”

• What to Look For: Restatements, late filings, or “clerical mistake” corrections.
• Example: “QRS Chemicals” restated FY20 numbers twice, citing “typos.”
• Why It Stinks: Audited numbers shouldn’t need constant fixes.
• Spot-It Hack: Check SE filings for restatement notices—frequent ones mean sloppy or shady.

18. 📉 Rising Customer Churn

• What to Look For: Customer retention dropping from 90% to 70%.
• Example: “TUV SaaS” lost 30% of subscribers in a year.
• Why It Stinks: Acquiring new users costs 5x more than keeping old ones.
• Spot-It Hack: Look at subscriber metrics in analyst presentations; watch churn rates.

19. 🌐 Weak Online Presence & Reviews

• What to Look For: No website updates, zero social media, and 1-star reviews galore.
• Example: “WXY Retail” had no updates since 2022 and 200+ one-star complaints.
• Why It Stinks: If customers hate you online, they’ll vote with their wallets.
• Spot-It Hack: Google the company name + “complaints” or “scam”; bad reviews = warning.

20. 👥 Skeleton Crew in Leadership

• What to Look For: CEO & CFO are it—no deputy or functional heads.
• Example: “ZAB Logistics” lists only CEO and CFO on its website.
• Why It Stinks: If one key person leaves, the whole ship lists.
• Spot-It Hack: Check “Board & Management” section—no depth equals high risk.

How to Use This List

1. Quick Scan: Bookmark this article. Before buying, run this checklist in 5 minutes.
2. Light DD: Spend 15 minutes digging into annual reports and news for any red flags.
3. Pass or Proceed: If you spot 3 or more major flags, lean toward “Pass.”
4. Deeper Dive: For fewer flags, dig deeper—talk to analysts, read transcripts, join forums.

Real-World Example:

Case Study: “FamousCorp”

• Ignored related-party loans (Flag #4) → founder’s SPV got ₹100 cr at rock-bottom rates.
• Debt shot up (Flag #5) → interest coverage fell below 1.5x.
• CFO resigned abruptly (Flag #3).
  Investors who caught all three walked away—those who didn’t lost 60% in 6 months. Ouch.

TL;DR

• Spot these 20 flags before you invest.
• 3+ flags = proceed with EXTREME caution or pass entirely.
• Due diligence is your best friend—use this guide!

✍️ Written by Prashant | 📅 June 17, 2025

Tags: investing, red flags, due diligence, stock picking, risk management, EduInvesting, portfolio protection, examples, screener-friendly