People generally invest in stocks to make reasonable profit. But, investing in stocks also has its share of risk. There is a need for them
to be aware of a little of risk management. While investing in the stock of a company we should be
looking for those companies which are doing well in their business and expected to do so for the foreseeable future. Therefore, we should be able to identify those companies, which might not perform well in future to avoid investing in them. To identify such companies, we could look for the following warning signs and avoid investing in them.
Dependence on Key Suppliers
Generally, any good company would like to keep its inventory level quite low at an optimum level. Whenever they require any inventory item, the vendors would supply them promptly and production process would go on smoothly. But, this might make the company dependent on these key suppliers. In a business scenario, when the demand of one of the products shoots up, the company might not be in a position to meet this increased demand because their key vendors are unable to provide the items required to produce the item in larger quantities. We could cite the case of Apple Computers. In 1999, Motorola was the sole supplier of G4 PowerPC Chip in computers being made by Apple. But, Apple was unable to cope up with tremendous increase in demand of their computers because Motorola was unable to supply those chips in required quantities fast.
Dependence on Key Customers
Like dependence on key suppliers, dependence on key customers for producing their product could be considered as another warning signal. In case, a company delivering most of its products to one or two company, it might be calling for trouble. In case, these customers stops buying these items from them, the company could land into big financial crisis and may even become bankrupt.
Dependence on a single product
Like depending on only a few suppliers and customers, if the company is producing only one or two key products, which could also lead the company to crisis. In case, orders for these products dry up, the company may have to close down and go bankrupt.
Character of Management
A management team who have substantial stake in the stock of the company would naturally work in such fashion that profit of company is maximized. This will definitely give the ordinary share holders of the company, better return. Another point to look for is the record of dividend payment. If the company pays increased dividend every year, it shows the company is doing well.
If you are always on the watch for these warning signs, you will not have any problem in the management of risks.
Increased Debt Equity Ratio
If the Debt Equity ratio of a company increases without any reason, it could indicate that company is not being managed properly. One should look out for such warning signals.
Perks paid to employees
Sometimes, people in top management squander the company's money in unnecessary expenses which might amount to millions of dollars. If this wastage could have been stopped, the ordinary investors of the company would have been benifitted.
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