Investors urged to study firms' results

John Hawkins president of the Shareholders Association says red flags could include the sudden departure of key staff. Photo / Chris Gorman

Shareholders should look for red flags in sales, debt and profit growth to gauge if it’s time to hold or fold.

Investors should pay close attention to a company's outlook, sales and profit growth and debt position when it comes to its result, according to the chairman of the Shareholders' Association, John Hawkins.

Hawkins said it was important to consider whether the business had lived up to its previous forecasts and, if not, whether it had signalled changes to the market before the result.

Analysing key metrics was also vital and investors should look at how a company's figures stacked up year on year and whether there was any significant decrease in sales, profit before tax or debt levels.

He said investors should consider the company's balance sheet - was it in a solid position and able to face up to potential challenges ahead?

Signs that a company may not be doing so well included debt blow-outs, inappropriately adjusted profit figures and a disconnect between reported profit and operating cash flows.

Hawkins said red flags could also include the sudden departure of key staff prior to the announcement, multiple profit warnings ahead of the result and an earnings miss that should have been communicated to the market before the result.

But a fall in a company's share price after its result announcement was not necessarily a sign to bail out.

"Bailing out should be reserved for when you think there has been an underlying change in the company's outlook.

"If the reasons you bought in the first place have not changed, then hold your nerve.

"But if things have really changed, then the first loss is the one to take.

"Remember that volatility leads to opportunity.

"For companies with sound fundamentals, a price drop may represent a buying opportunity."