“The essence of investment management is the management of risks, not the management of returns.” – Benjamin Graham
India’s stock market has been booming, crossing the $5 trillion milestone. With millions of new investors entering the scene, the opportunity is massive, but so are the risks.
According to Pranjal Kamra, founder of Finology, “Most investing mistakes aren’t made because people choose the wrong stock, but because they ignore basic red flags.” His years of market experience show that avoiding certain traps is just as important as spotting winning companies.
Here are 7 major red flags every Indian investor should watch for, along with practical checks you can perform using tools like the Finology Ticker stock screener.
1. Companies That Keep Losing Money
Just because an industry is growing doesn’t mean every player in it will survive. Avoid companies that consistently post losses, regardless of their sector.
Examples:
- Vodafone Idea: Despite massive demand for telecom services in India, the company has struggled with continuous losses due to its massive debt.
- Paytm (in its early years): The digital payments sector was growing rapidly, but the company posted huge losses before finally turning profitable through aggressive cost-cutting.
Pro Tip – Use the Finology Ticker Screener to filter out loss-making companies by checking consistent net profit over the years.
2. Low Return on Equity (ROE)
ROE indicates how well a company uses shareholders’ money to generate profit. An ROE below 10-12% for several years may indicate poor capital efficiency.
Example:
Many public sector banks underperformed for years due to low ROE compared to private sector peers.
Pro Tip – With Finology Ticker, you can screen for companies consistently delivering ROE above 15%.
3. Overpriced Stocks with Slowing Growth
High valuations only make sense if a company’s earnings are expected to grow fast. If growth slows, the stock price can fall sharply, even for well-known names.
Example:
Companies like Nerolac Paints, Bata India, and Whirlpool were market darlings, but their high prices couldn’t protect investors when their growth slowed down.
Investor Tip: “Valuation without growth is just speculation,” says Pranjal Kamra. Focus on earnings growth and not just brand names.
4. Hype-Driven Stocks Without Profits
Trendy themes like AI, drones, or green energy attract attention, but not always profits. When narratives fade, stock prices can fall sharply.
Case in point:
Adani Green Energy saw a steep correction despite the renewable sector’s promise, as valuations outpaced earnings.
Pranjal Kamra advises: “Always look at numbers first.” Use Ticker’s financial reports to verify earnings and margins.
If you want help picking fundamentally sound stocks backed by research, not trends – Finology 30 curates one quality stock every 12th day, with its max buy price and fair valuation clearly defined.
5. Stock Tips from Unverified “Finfluencers”
Many social media stock tips lack research or accountability. SEBI has started cracking down on such unregulated advice.
Investor Tip: Always check official data, like annual reports and filings. The Finology Ticker platform simplifies access to verified company information, helping investors make informed decisions. Just visit their report section for free.
6. Weak or Controversial Management
A company is only as strong as its leadership. Frequent strategy shifts, legal troubles, or senior resignations are signs of deeper issues.
Red Flags to Watch:
- Frequent CEO or CFO resignations
- Ongoing regulatory issues or lawsuits
- No clear long-term strategy
Example:
Manpasand Beverages collapsed after audit irregularities raised serious governance concerns.
7. High Debt and Poor Interest Coverage
Debt isn’t always bad, but if a company can’t pay its interest, that’s a red flag. A quick check is the Interest Coverage Ratio (ICR). An ICR below 1 means the company isn’t earning enough to service its loans.
Investor Tip: Choose companies with ICR above 2. Finology Ticker offers an ICR filter to help spot financially sound firms in seconds.
Final Checklist for Safer Investing
Here’s a quick summary of red flags and how to avoid them using simple checks:
- Profits matter: Avoid companies with consistent losses.
- ROE check: Look for Return on Equity above 15%.
- Valuation vs. growth: Don’t overpay for slowing companies.
- Ignore hype: Trends are risky without real earnings.
- Avoid finfluencer tips: Trust data-backed platforms like Finology Ticker.
- Trustworthy management: Watch for frequent exits or legal issues.
- Debt caution: Stick to firms with an Interest Coverage Ratio above 2.
Closing Thoughts
Great investing isn’t about finding the next multi-bagger; it’s about avoiding mistakes that erode your capital.
As Pranjal Kamra puts it: “You don’t need to be a genius to invest well. You just need discipline and the right tools.” Platforms like Finology Ticker make this easier by providing key financial insights and filters at your fingertips.
Start using free tools like Ticker’s stock screener to spot red flags before they cost you money.
By following a simple, checklist-driven approach, Indian investors can build portfolios that survive the noise and thrive in the long run.
Finology is a SEBI-registered investment advisor firm with registration number: INA000012218.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
