Analysts look for red flags in financial statements that may signal financial trouble.Which of the following is a red flag that suggests that a company may be in trouble?
A)a decline in days' sales in inventory
B)a decrease in dividend payout ratio from year to year
C)a reduction in the debt ratio
D)net cash flow from operating activities is consistently lower than net income

Question

Quizplus · Accepted Answer

Net cash flow from operating activities being consistently lower than net income can indicate that a company is not generating enough cash from its core operations to sustain its current level of operations, potentially leading to financial trouble. A decline in days' sales in inventory may actually be a positive sign of a company efficiently managing its inventory levels. A decrease in dividend payout ratio from year to year may simply be a management decision to reinvest earnings back into the company. A reduction in the debt ratio could actually indicate a decrease in the company's financial risk.

Analysts Look for Red Flags in Financial Statements That May