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Top warning signs of a company in trouble: report

There are at least 16 early warning signs and red flags signalling potential woe in the companies you invest in – and learning what they are could make you a savvier investor.

A new report by corporate governance advocate Mak Yuen Teen purports to help investors spot early signs of trouble, using a model that analyses a company’s business model and its key events and transactions.

The 52-page study, "Avoiding potholes in listed companies", is meant for the public investor, especially the retail investor - who has access only to public information, such as annual reports and corporate announcements, and who has limited expertise in analysing corporate governance and financial statements.

“This report aims to help retail investors by highlighting warning signs and red flags from publicly available information that often precede major corporate scandals and failures, so that they can stay vigilant and minimise or prevent losses,” said Assoc Prof Mak, who is with the NUS Business School.

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The report was co-authored by NUS Business School adjunct associate professor Richard Tan, and sponsored by accounting professional body CPA Australia.

Their study uses a model they call the “B-C-D-E Model”, which focuses on and suggests questions investors should ask about four key areas of a business: business model; corporate governance; disclosure and reporting; and events and transactions.

Based on this, the authors have identified some of the top early warning signs:

* unexplained changes in results attracting a Singapore Exchange (SGX) query;

* foreign incorporation;

* change of sponsor (for Catalist companies);

* independent directors participating in performance incentive plans (such as share option plans);

* having a founder who is also the executive chairman/CEO;

* non-payment of dividends;

* disclosure/trading queries from SGX; and

* profit warning(s).

It also cites real-life examples of Singapore Exchange (SGX)-listed companies to illustrate the issues covered.

The full report – with all the key warning signs and red flags - is available on the websites of CPA Australia (www.cpaaustralia.com.au) and Prof Mak (governanceforstakeholders.com).