We believe there is no such thing as a single red flag that defines the entire analytical conclusion for a company – flags are rarely red as single data points. Our amber flags approach fuses a fundamental analytical framework with a dose of quant to build focused insights at scale. 

We provide a scalable approach to identify amber flags in financial statements As outsiders looking into a company, financial statements provide a gateway for investors and analysts to understand the economic reality and financial health of a company. However, given the large universe of companies in the market, it is difficult for us to read through each company’s financial statement from cover to cover. Therefore, in our previous note “Amber flags – a scalable approach to identifying warning signs in financial statements”, we provided a scalable framework to identify any warning signs – we term them as “amber flags” – in financial statements. 

We expanded our list of amber flags metrics to identify statistical outliers 

We expand our amber flags metrics to 14 in this note – one new metric being cash conversion ratio. These metrics focus on the earnings quality as well as balance sheet strength of the company as they impact returns. We compare these metrics across the peer group and to historical data, and identify the statistical outliers, which are our amber flags. We can then focus on these amber flags and dive into the financial statements to understand the reasons behind them. 

We apply our amber flags approach to six tobacco companies 

In our previous note, we applied our amber flags approach to nine European beverages companies. In this note, we collaborated with our colleagues from the Tobacco sector and applied our approach to six tobacco companies. We identified the amber flags and analysed the reasons behind these outliers and whether they might impact future returns.