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SJPT: SG Red flags analysis

A number of financial scandals that have occurred in recent times were usually followed by manipulation of the financial statements. This only confirms the importance of information in financial statements. That they are not important there would be no need  State regulations and the accounting profession in the developed countries reacted by trying to build a better institutional framework for financial reporting which is characteristic above all to strengthen the supervisory role state over financial reporting practices.

In addition to standard financial analysis, financial analysts are increasingly used by some non-standard methods, which can be good indicators warning of the existence of creative accounting practices. Practical experience has developed a specific benchmark values ​​that indicate the need for additional research if the values ​​of the studied indicators warn to avoid making wrong business decisions.

In addition to warning indicators of financial quantitative analysts use the so-called, qualitative warning indicators that describe the events and activities that may indicate the possibility of creative financial reporting.


Balance of risk indicators 2009 2010 2011 Red Flag
Ability to create cash flow for debt repayments  in  000 RSD 2,036,781 5,500,227 173,581 Negative operating cash flow
Abilty to finance capital expenditure 2,99 16,23 0,10 Significantly less than 1 possible disruption of financial structure
Abilty to finance capital expenditure and dividends 2,99 16,23 0,10 Same cautions
Impact of transactions on the financial structure 0,70 0,65 0,71 Faster growth of borrowed resources in relation to its own leads to disruption of financial structure
Quality Revenue Ratio 1,24 1,23 1,17 Risk increase with decrease of this ratio
Quality of Earnings Ratio 0,88 0,35 8,29 Risk increases with a significant deviation from 1
Debt to equity 1,10 0,71 0,51 Greater than 1 increases the degree prudence
Ratio of net tangible assets % 89,11 137,12 192,59 Less than 25
Ability to pay interest % 33,18 75,38 256,74 Less than 50
Abiliity to pay interest  % 1,95 3,80 17,19 Less than 25
Hidden losses in Accounts & Notes Receivable  % 35,61 32,51 30,80 Greater than 15
Hidden losses in inventories % 56,45 48,10 43,89 Greater than 25
Company’s ability to achieve returns 2,33 1,91 1,62 If ROA is approaching cost of capital and ROE, it’s a warning sign, as well as if ROA and ROE are lower than competitors and industry averages
Estimating transitory elements in yields % -0,09 -0,65 -0,53 Take into account the transitory gains
Attractiveness of the expected earnings – P/B ratio 1,41 1,08 0,65 If both indicator are low expected earnings are less than the current and vica versa
Attractiveness of the expected earnings – P/E ratio 25,99 28,64 5,46  



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