Most numbers in a filing look fine in isolation. The risk lives in the relationships between them — revenue versus cash, profit versus addbacks, growth versus the debt that paid for it. A red flag isn't a verdict; it's a place where two figures that should move together don't, which tells you to slow down and read further before you commit capital.
Here are seven, strongest first. Each is a pattern you can check in minutes from free filings, with a concrete threshold and a decision rule. None of them is fatal alone. Two or more together is a reason to demand a very good explanation.
1. Profit rises but free cash flow doesn't
This is the single most useful flag, because cash is the hardest number to manufacture. Reported earnings rest on judgment calls — when to recognize revenue, how fast to depreciate, what to capitalize. Free cash flow (operating cash flow minus capital spending) is closer to what actually lands in the bank.
Check: plot net income and free cash flow side by side for three to five years. If earnings climb while FCF stays flat or falls, the profit is increasingly made of accruals, not cash. Rule: if cumulative FCF is below cumulative net income over five years, treat the earnings as soft until you know why.
2. Growth was bought with debt
Revenue growth is only impressive if it isn't borrowed. A company can buy its way to a bigger top line — acquisitions, inventory, marketing funded by loans — and the growth looks organic until the interest bill arrives.
Check: compare the growth rate of revenue to the growth rate of total debt over the same period. If debt is compounding faster than sales, leverage is doing the work. Pair this with net debt ÷ EBITDA: under ~2x is generally comfortable, over ~4x is a thin margin for error in a cyclical business. Rule: if debt outgrows revenue for two consecutive years, model a bad year before you buy, not after.
3. The profit only works "adjusted"
Companies report a GAAP number and, beside it, an "adjusted" or "non-GAAP" number that strips out costs management calls one-time. Some of those addbacks are fair (a genuine legal settlement). Many recur every single year — restructuring that never ends, stock-based compensation, "integration costs" for a serial acquirer.
Check: subtract the addbacks and look at the unadjusted figure. Rule: if a cost labeled "one-time" appears in three or more consecutive years, it is an operating cost — count it. A business that is only profitable after you ignore its real expenses is not profitable yet.
4. Receivables or inventory outrun sales
On the balance sheet, accounts receivable (money owed by customers) and inventory should grow roughly in line with revenue. When they grow faster, demand may be softening or the company may be booking sales it hasn't truly earned.
Check: compute days sales outstanding (receivables ÷ revenue × 365) and inventory days year over year. Rising receivable days can mean the company is loosening credit to push product; rising inventory days can mean goods aren't selling. Rule: if either metric climbs more than ~15% while revenue growth is flat, ask the company directly what changed.
5. The share count quietly climbs
A growing business can still be a shrinking investment if your slice of it keeps getting smaller. Net income can rise while earnings per share stagnates because the company keeps issuing stock — often to pay employees without spending cash.
Check: pull diluted shares outstanding for five years. Rule: if the count rises more than ~2–3% a year with no matching jump in the business, discount the headline growth — you own less of each future dollar than the totals suggest. Buybacks do the reverse, but only count them if they're funded by cash, not new debt.
6. The business leans on one customer or segment
Concentration turns an ordinary problem into an existential one. If a large share of revenue comes from a single customer, product, or geography, the loss of that one thing isn't a bad quarter — it's a different company.
Check: the 10-K usually discloses any customer above 10% of revenue, plus a segment breakdown. Rule: if one customer or segment exceeds ~20% of revenue, size the position as if that relationship could end, because contracts renew and you don't control the renewal. Diversification inside the business matters as much as diversification across your portfolio.
7. The metric the company emphasizes keeps changing
This is the softest flag and often the most telling. When a company highlights "active users" one year, "bookings" the next, and "adjusted EBITDA" the year after, it may be steering your attention toward whichever number currently looks best.
Check: read the last three years of shareholder letters or earnings releases and note the headline metric each time. Rule: if the goalpost moves while the old metric quietly deteriorates, weight the metric they stopped talking about — the abandoned number usually tells the truer story.
How to use these
None of these flags is a sell signal on its own. A high-growth company will issue some stock; a capital-intensive one will spend cash; a young one will adjust for real one-time costs. The signal is in the cluster: a single flag invites a question, two or more demand an answer you can articulate before you buy.
The practical move is to keep the checklist somewhere you'll actually reuse it. Open a note for the company, run the seven checks, and write one line under each — number, threshold, pass or flag. Do that for the next stock you're tempted by, and you'll have a one-page record you can compare against the same company a year later, or against the next candidate. Keeping those checklists searchable in JustJot.ai turns a one-time gut check into a repeatable process — which is the only thing that compounds in research as reliably as it does in returns.