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What are Warning Signs

Warning Signs feature allows users to take note about potential red flags.

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, Financial).

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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.

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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.

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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.

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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.

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Figure 4

If you have any questions about our website, please contact us. Users can also schedule a live Q&A session for a demo about our key website features.

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