Sales Slow Down
Before you invest in a company, make sure that sales are strong and rising. If sales start to decline, that downward motion ultimately affects earnings. (See the previous section, "Earnings Slow Down or Head South.") Although the earnings of a company may go safely up and down, sales should consistently rise. If they cease to rise, a variety of reasons may be to blame. First, it may be temporary because the economy in general is having tough times. However, it may be more serious. Perhaps the company is having marketing problems, or a competitor is eating away at its market share. Maybe a new technology is replacing its products and services. In any case, falling sales raise a red flag you shouldn't ignore.

Exuberant Analysts Despite Logic
Too often, analysis give glowing praise to stocks that any logical person with some modest financial acumen would avoid like the plague. Why is this? In many instances, there is, alas, a dark motive (or something not so dark such as ... ugh ... stupidity). In any case, remember that analysts are employed by companies that earn hefty investment banking fees from the very companies that these analysts tout. In that situation, issuing a less-than-complete or truthful report can be easy.

Insider Selling
Heavy insider selling is to a stock what garlic, sunrises, and crosses are to vampires: an almost certain sign of doom! If you notice that increasing numbers of insiders (such as the president of the company, the treasurer, and the vice-president of finance, for instance) are selling their stock holdings, you can consider it a red flag. In recent years, massive insider selling has become a telltale sign of a company's imminent fall from grace. After all, who better to know the company's prospects for success (or lack of) than the company's high-level management? What management does (selling stock, for example) speaks louder than what management says.

Dividend Cuts
For investors who own income stock, dividends are the primary consideration. But, income stock or not, dividend cuts are a negative sign. Of course if a company is having modest financial difficulty, perhaps a dividend cut is a good thing for the overall health of the company. However, usually analysts see a dividend cut as a sign that a company is having trouble with its earnings or cash flow. If the company you own stock in announces a dividend cut, find out why. The cut may be simply a temporary measure to help the company out of some minor financial difficulty, or it may be a sign of deeper trouble. Check the company's fundamentals and then decide.

Increased Negative Coverage
You may easily recognize unfavorable reports of a company's stock as a sign to unload that stock. Or you may be a contrarian and see bad press as an opportunity to scoop up some shares of a company victimized by negative reporting. In any case, take the negative reports as a signal to further investigate the merits of holding on to the stock or as a sign for selling it so that you can make room in your portfolio for a more promising stock choice.

Industry Problems
Sometimes being a strong company doesn't matter if that company's industry is having problems; if the industry is in trouble, the company's decline probably isn't that far behind. Try to be aware of industries that are intimately related to your industry. Very often, problems in one industry can affect or spread to a related industry. If auto sales are plummeting (for example), then that may have a negative effect on prospects for auto parts or auto services companies.

Debts is too high or unsustainable
Excessive debt is the kiss of death for a struggling company. During 2000-2002, many companies that experts thought were invincible went bankrupt. In 2001, a record 255 public companies filed bankruptcy. The most obvious example is Enron. Many analysts and investment advisory publications actually touted Enron as a strong buy — even though the amount of problematic data could have made Godzilla gag.

Funny Accounting: No Laughing Here!
Understanding a company's balance sheet and income statement, and making a simple comparison of these documents over a period of several years, can give you great insights into the company's prospects. You don't have to be an accountant to grasp key concepts.

Source:
Paul Mladjenovic, Stock Investing for Dummies, Wiley Publishing. You can obtain this excellent book here