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Spotting red flags

It’s important to look beyond the profit-and-loss account to properly assess a company’s prospects. Algy Hall gets the top tips of three industry experts on how to use a company’s accounts to spot signs of an impending company implosion
Spotting red flags

What tricks can investors use to spot the signs of an impending stock market disaster like Carillion’s collapse, the fraud at Patisserie Valerie or Tesco’s 2014 accounting scandal? It is a question we’ve put to three experts in forensic accounting and the easy-to-follow techniques they’ve highlighted could save others from making costly investment mistakes.

But before revealing all, it is worth considering how best to use this advice. The idea of short selling can seem very attractive. But Matthew Earl, one of the expert contributors to the advice in this article, who runs a short-focused hedge fund, suggests would-be short sellers think twice. “No one in their right mind wants to be a short seller,” he says. “I believe you’re just born a short seller.”

Indeed, the asymmetric risk that favours owners of shares (in theory there is infinite upside to a share price but only 100 per cent downside) works in reverse for short sellers. So, for readers who do not fall into that rare category of “born short seller”, perhaps the best way to apply the advice in this article is illustrated by the “iceberg principle”, as expounded by another contributor, retired fund manager and financial author Tim Steer. 

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