Key Balance Sheet Red Flags

By Michael C. Dennis

IMO, these are the key red flags on a customer Balance Sheet:

·????? A "qualified" audit opinions, or auditor changes

·????? A restatement of prior period financials

·????? A sharp increase in intangible assets

·????? A significant increase in accounts receivable compared to revenue growth

·????? A weakening of one or more liquidity ratios

·????? An increase in one or more financial leverage ratios

·????? Complex intercompany transactions lacking clear business purpose

·????? Declining cash balances

·????? Excessive capitalization of internal costs

·????? Frequent debt refinancing

·????? Increasing debt levels without justified business expansion

·????? Large write-offs of obsolete inventory

·????? Negative working capital or deteriorating ratios

·????? Reported an accumulated deficit net worth

·????? Rising inventory levels without corresponding sales growth

·????? Unexplained changes in reserves or allowance, or any unusual increases in any of the current asset or current liability accounts

These red flags often signal potential financial distress, aggressive accounting practices, or underlying business issues.