How to use this tool
How to use this tool
Watch for Slowing Growth
by Roger Wohlner (Write for us!)
(Click on the links within the article to get definition of that word)
(Click on the links within the article to get definition of that word)
Reports of slowing growth or earnings declines can
severely punish a stock's price. So you aren't surprised by this type of news for your stocks, look out for these three warning signs when you review financial reports:
- Accounts receivable growth
Accounts receivable represents amounts owed to the company by customers for goods received. Receivables typically track sales, so as sales increase, receivables increase and vice versa. When accounts receivable start to increase significantly faster than sales, find out why. Some possible reasons include the company is not following up with slow paying customers, customers are withholding payments due to product dissatisfaction, customers don't have cash to pay bills, or the company is providing longer payment terms to increase sales. All of these situations can forewarn of potential problems.
- Lower gross margins
Gross margins represent the profit made on products before considering overhead, marketing, and research and development costs. Declining gross margins mean either that the company is cutting prices to maintain market share or production costs are increasing and the company can't increase prices to compensate. Both are warning signals for future earnings shortfalls.
- Cash flow
Reported earnings are based on numerous accounting decisions, which can change over time. Cash flow, however, measures how cash has flowed in and out of the company's bank account. Thus, it is often viewed as a better gauge of results than reported earnings. If net income is increasing but cash flow is decreasing, this could be a sign of a potential problem.
Email this Article
Print this Article
Cite this Article
Other Suggested Articles
Evaluating Potential Stock Investments >
The CANSLIM Stock Strategy >
Buy and Hold Stock Strategy >
Dollar Cost Averaging Stock Strategy >
Short Selling >
Buying Stocks Using Growth Strategy >
Understanding GARP Stock Investing Strategy >
Choosing a Stock >
Basics of The Value Investing Stock Strategy >
Market Timing Strategy of Buying Stock >
Other Articles By This Author
What Happened to Personal Saving? >
Money and Marriage >
Watch Out for These Mistakes >
A Return to Dividends? >
Deciding on a Withdrawal Rate >
Stretching Your Salary >
Taxes and Your Investments >
Is an Interest-Only Mortgage Right for You? >
Tips for Your College Education Fund >
A Checklist for Bond Investors >
Article reprinted with permission. Unauthorized reproduction of this content is prohibited.
Click here to license InvestorGuide University content.
Click here to license InvestorGuide University content.
