4. Returns Ratios

As an investor you can do well if you keep a watch on ratios such as Return on Capital Employed (ROCE) and Return on Equity (ROE). Return on Equity reflects how much profit a company generates using the shareholders’ money, while a return on capital employed reflects how efficiently the company is using its capital. Mehta adds, “If the company is not able to generate ROE in excess to at least 13-14 percent, it is a red flag.” High return ratio is one of the reasons for the companies in the consumer durables sector enjoying high valuations.

5. Balance Sheet Issues

A balance sheet of a company reveals what it owns (this refers to the company’ Assets) and what it owes (this refers to the company’ liabilities).When the company’s books of account are showing rising debt levels, consider it to be a warning sign. As there can be chances of your company failing to repay its debt and finally crashing down like the King Fisher Airlines company. Therefore, you must be cautious about your company’s debt levels so that you can avoid in being under the unfortunate situation where your stock value falls to zero.

Also Read: 7 Financial Tips For Your Big Career Shift