Part 7 · In practice: read and judge for yourself · Lesson 34
10 warning-sign checklist
A risky company shows itself not through one number but through several signals overlapping. Let's bundle everything you've learned so far into a ten-box checklist.
QToday's question
Some companies look cheap because their share price has dropped a lot. Is there a quick way to screen out 'companies to avoid' before you buy?
Across Lessons 1 through 33, there were signals everywhere that said 'be careful if you see this'. They are easy to forget when scattered, so today we gather those ten signals into a single checklist. How many of them overlap matters more than any one of them.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
In Lesson 9 we saw capital impairment and administrative issues; in Lesson 21, Dark Cloud Electronics, which is profitable but running out of cash; and in Lesson 22, the signal of receivables growing faster than revenue. We also revisit the audit opinion and going-concern uncertainty from Lesson 30 and the three kinds of convertible bonds from Lesson 31 today. Even the changes of largest shareholder and corrected filings from Lessons 32 and 33 all fit into the ten boxes.
- STEP 1 · Basic conceptsThe ten red flags and where to check them
You will be able to divide the ten signals into three groups (numbers, funding, trust) and say in which report and which box each one is checked.
- STEP 2 · Understanding the principleSignals link up like a chain
You will be able to explain in what order the signals spread, from a surge in receivables to a modified audit opinion, and connect them to the exchange's systems (administrative issues and the substantive review).
- STEP 3 · Applying itScreening companies with the checklist
You will be able to tick the checklist yourself and assign traffic-light colors, then skim three years of filings on DART and KIND to fill in the blanks.
STEP 1The ten red flags and where to check them
Let's gather every 'be careful' you've learned so far in one place. Dividing the ten into three groups makes them much easier to remember.
Easy analogy · a health checkup report
If a checkup report shows only 'blood pressure slightly high', you can fix it by changing your habits. But if your blood pressure, blood sugar and liver numbers are all red at once, that's a different story. Each may look small, but together they are a warning from the whole body.
Companies are the same. A small rise in receivables alone may not be a worry. But if unpaid bills pile up, operating cash flow is negative, convertible bonds are issued one after another and even the auditor changes, you need to read the warning the company is sending.
The ten signals in three groups
| Signal | What to look at | Where to check |
|---|---|---|
| 1. | Whether operating or net losses continue for two years or more | III. Summary financial information, 3 years (Lessons 12 and 27) |
| 2. | Whether total equity has fallen below share capital | Equity section of the consolidated balance sheet (Lesson 9) |
| 3. Persistently negative | Whether operating cash flow is negative for 2–3 years in a row despite profits | Consolidated cash flow statement (Lessons 18 and 21) |
| 4. Surge in receivables | Whether are growing much faster than revenue | Compare the balance sheet and income statement (Lessons 7 and 22) |
| 5. Frequent CBs and paid-in capital increases | Whether the company has done several or deals in the past 2–3 years | Filing list · material event reports (Lesson 31) |
| 6. Frequent changes of largest shareholder | Whether the company's owner has changed several times in a short period | VII. Shareholders, largest shareholder change disclosures (Lesson 32) |
| 7. Auditor change or modified opinion | , , and a paragraph | V. Auditor's opinion, audit report (Lesson 30) |
| 8. Repeated | Whether the same report or results were corrected and refiled several times | The [Corrected] label in the filing list (Lesson 33) |
| 9. designation | Whether the exchange has designated the stock an administrative issue or given advance notice of designation | KIND market measures · stock information (Lesson 9) |
| 10. disclosure | Whether there has been a disclosure of suspected embezzlement or breach of trust by an officer or employee | KIND exchange disclosures · DART exchange disclosures |
Numbers 7, 9 and 10 are 'heavy signals' directly tied to exchange systems. In the checklist below, if any of these three boxes lights up, it is marked red regardless of the count.
Quick check"Profitable for three years in a row, yet operating cash flow is negative for three years in a row." Which of the three groups does this signal belong to, and which statement do you check it in?
STEP 2Signals link up like a chain
Red flags don't appear all at once. Often one calls the next, spreading in turn.
The chain of signals, seen through Dark Cloud Electronics
Let's recall Dark Cloud Electronics (fictional) from Lesson 21. The starting point was a small number signal. Revenue grew from KRW 20 billion to KRW 24 billion, yet trade receivables more than doubled, from KRW 3 billion to KRW 7.5 billion. It had sold, but had not been paid. As a result, net income was positive for all three years, but operating cash flow got deeper and deeper: −KRW 0.4 billion, −KRW 1.5 billion and −KRW 2.2 billion.
When cash runs short, a company draws money in from outside. Dark Cloud Electronics issued convertible bonds three times in two years, KRW 6 billion each time. As calculated in Lesson 31, if all of these CBs convert into stock, the share count goes from 1 million to 2.2 million, and existing shareholders' stake shrinks to about 45%. The number signal has spread into a funding signal. After that, the auditor changed. An auditor change is not wrong in itself, but if it happens just when cash is drying up and unpaid bills are piling up, you should watch whether it leads to the going-concern uncertainty paragraph from Lesson 30 or a modified opinion.
The chain of signals · tap through the steps (Dark Cloud Electronics, fictional)
The order of the chain is an educational example that simplifies a commonly seen flow. A real company may show a different order or only some of the steps.
Signals tied to exchange systems
Heavy signals are heavy because they connect directly to exchange systems. Article 47 of the KOSPI Market Listing Rules sets the criteria for administrative issue designation, including failure to file periodic reports, an audit opinion below the standard (qualified, etc.), capital impairment of 50% or more of share capital, and falling short of revenue or market cap standards. Once a stock becomes an administrative issue, margin trading is prohibited, and if the cause is not resolved it can lead to delisting. The revenue and market cap standards are being raised in stages under the exchange's 2025 rule amendments, so check the exact figures in the exchange rules at the time.
Embezzlement and breach of trust work the same way. A listed company must disclose 'occurrence of suspected embezzlement/breach of trust' when it confirms the suspicion for an executive regardless of the amount, and for an employee when the amount is 5% or more of equity (a lower percentage for large corporations). On KOSDAQ, if the suspected amount for an executive is 3% of equity or KRW 1 billion or more, the company can become subject to a . Once a substantive review starts, trading is suspended and the exchange weighs the company's continuity and transparency to decide whether to keep it listed.
Common misconceptions
- "If a company is profitable, red flags don't matter?"
- Even with three straight years of profit, like Dark Cloud Electronics, several signals can light up in cash, debt and disclosures. Net income only confirms one of the ten boxes (consecutive losses).
- "On KOSDAQ, four years of consecutive operating losses make a stock an administrative issue?"
- That is an old rule. KOSDAQ's rule designating companies with operating losses for four consecutive fiscal years as administrative issues was deleted in the rule amendment at the end of 2022. As a result, even a company in the red for a long time can stay listed, and investors have to check consecutive losses themselves.
- "If there is even one signal, you must avoid it?"
- An auditor change can happen regularly because of the auditor designation system, and a corrected filing may be just a typo fix. A single signal is 'a place to check', and it becomes 'risk' when several signals overlap.
Quick checkOn one company's checklist, only 'surge in receivables' is lit. There are no other signals. What color is the traffic light, and what do you check next?
STEP 3Screening companies with the checklist
Now try ticking boxes yourself. Load Robin Bakery and Dark Cloud Electronics, or mark a company you're interested in on the blank checklist.
checklist, 10 boxes · Your ticks are saved in this browser
Dark Cloud Electronics' six boxes are based on the fictional numbers used in Lessons 21, 22, 29, 31 and 32 and the assumption of a 'year 3 quarterly report receivables correction (fictional)'. The traffic-light criteria are a simplification for teaching set in this lesson.
Heavy signals in numbers
Statistics show how heavy the heavy signals really are. According to the FSS's analysis of FY2025 audit opinions, of the 84 companies that received an unqualified opinion for FY2024 but carried a going-concern uncertainty paragraph, 27 were delisted or received a modified opinion the following year. For companies without such a paragraph, the same rate was only 1.4%.
Source: FSS, 'Analysis of Audit Opinions in Audit Reports of Listed Companies for FY2025' (reported 2026-06-16; the figures checked in Lesson 30)
Find it yourself on DART
Most blanks in the checklist can be filled in from a single filing list.
1 As in Lesson 3, search for the company and widen the period to 3 years. 2 Leave the filing type blank to bring up the full list, then look in the titles for 'Decision on convertible bond issuance', 'Decision on paid-in capital increase', 'Change of largest shareholder', '[Corrected]' and 'Embezzlement/breach of trust' and count them. 3 In Chapter III summary financial information of the latest annual report, check three years of operating profit and equity, and in the consolidated cash flow statement, check cash flow from operating activities. 4 In Chapter V, see whether the audit opinion and the auditor's name are the same every year. 5 Finally, on the exchange disclosure site , check whether there have been market measures such as an administrative issue or investment caution designation.
How to use it in investing
| Check result | Next action |
|---|---|
| Green (0–1) | It was not screened out by red flags. Now move on to the profitability and valuation lessons (Lessons 23–27) to see 'whether the price is good'. |
| Yellow (2–3) | For each lit box, go back to the matching lesson and reread three years of numbers, then watch the next quarterly report to see whether the signal grows or shrinks. |
| Red (4 or more) | Check whether the signals are linked to each other (a chain). If they are, weigh the company's chances of survival before a cheap-looking share price. |
| One heavy signal | An audit opinion, administrative issue or embezzlement/breach of trust can lead straight to a trading halt or delisting. Follow the filings through to the end. |
If you are investing with borrowed money, a stock with lit red flags can swing sharply in a short period. Use the Margin Call Calculator to check in advance how far your collateral ratio can hold.
The checklist does not replace investment judgment. No signals does not mean a good company, and having signals does not necessarily lead to a bad outcome. The checklist's role is to tell you 'where to read more deeply'. It is not a recommendation to buy or sell any specific stock.
Quick checkThe only signal is 'auditor change', but that year's audit report newly carries a going-concern uncertainty paragraph. What color is the traffic light?
✓What we learned today
- Red flags are divided into three groups: number signals (consecutive losses, capital impairment, negative operating cash flow, a surge in receivables), funding and control signals (frequent CBs and paid-in capital increases, frequent changes of largest shareholder) and trust signals (auditor change or modified opinion, repeated corrected filings, administrative issue, embezzlement/breach of trust).
- Signals often don't come alone but link up like a chain. When unpaid bills pile up and cash dries up, the company holds on with CBs, and it spreads to dilution, changes in control and tougher audits.
- Being profitable is not necessarily safe. Dark Cloud Electronics (fictional) was profitable for all three years, yet six boxes light up on the checklist.
- Signals tied directly to exchange systems, such as a modified audit opinion, capital impairment, administrative issue designation and embezzlement/breach of trust, are taken seriously even when there is only one.
- The checklist is not a verdict machine that says 'don't buy'; it is a map that shows where to check more deeply. For each lit box, go back to the matching lesson and reread the numbers.
Now that you have the checklist in hand, it's time for the real thing. In the next lesson, we lay out Robin Bakery's and Dark Cloud Electronics' three years of financial statements side by side across five statements and find the differences like a detective.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. Which of the following is NOT a 'number signal'?
An auditor change is a 'trust signal' about how far the numbers can be believed. The other three show up directly in the financial statement numbers.
Q2. Dark Cloud Electronics (fictional) was profitable for all three years. What is the best explanation for why several red flags are lit anyway?
It is a chain: surge in receivables → negative operating cash flow → frequent CBs. If you look only at net income, you can't see these signals.
Q3. Which of the following is NOT a criterion for administrative issue designation on the KOSPI market?
Not paying dividends is not a ground for administrative issue designation. Failure to file reports, an audit opinion below the standard, capital impairment of 50% or more, and falling short of revenue or market cap standards are among the criteria.
Q4. "A KOSDAQ company becomes an administrative issue if it has operating losses for four years in a row." Which statement is correct?
KOSDAQ's rule designating companies with four consecutive fiscal years of operating losses as administrative issues was deleted at the end of 2022. That makes the habit of checking consecutive losses yourself even more important.
Q5. On the checklist only one signal is lit, and it is an 'occurrence of suspected embezzlement/breach of trust' disclosure. How should you read it?
Depending on the amount, embezzlement/breach of trust is a heavy signal that can lead to a listing eligibility review and a trading halt. Look at weight before count.
NextTerms · Next lesson · Related tools
A state in which operating or net losses continue for two years or more. Check it with three years of operating profit and net income in the summary financial information. KOSDAQ's rule designating companies with four consecutive fiscal years of operating losses as administrative issues was deleted at the end of 2022, so it has become more important for investors to check this themselves.
Capital impairmentCapital impairmentA state in which accumulated losses have made total equity smaller than share capital. If total equity is zero or below, it is full capital impairment.
Cash flow from operating activitiesCash flow from operating activitiesThe cash that actually came in and went out from the core business, such as selling products and paying for materials, wages and taxes. Whether it is consistently positive is the basic check on a company's strength.
Trade receivablesTrade receivablesMoney owed for goods or services already sold but not yet received. If it grows much faster than sales, it can be a sign the company isn't getting paid.
Convertible bond (CB)Convertible BondA corporate bond with the right to convert into the company's shares at a set price. The company can borrow at a low interest rate, but when it converts into shares, existing shareholders' stakes are diluted. Repeated issuance can be a sign of cash shortage.
Paid-in capital increasePaid-in capital increase (rights / public / third-party offering)A company issues new shares and sells them for cash. Equity rises, but the share count also rises, so existing shareholders' ownership and earnings per share can be diluted. Methods include shareholder allotment, public offering and third-party allotment.
Change of auditorChange of auditorWhen the accounting firm that performs the company's external audit changes. You can see recent auditor history in Section V of the annual report, and frequent changes are read as a signal to check whether the company is looking for an auditor who will give an opinion more easily.
Non-clean opinionModified (non-clean) audit opinionA collective term for the audit opinions other than unqualified: qualified, adverse and disclaimer. Adverse, disclaimer and qualified due to a scope limitation are grounds for delisting by the exchange.
Corrected filingCorrected filingA filing that corrects and resubmits content already filed. You can recognize it on the DART list by a correction marker or a prefix such as [Correction of Entries], and you should check the reason for the correction and the before-and-after comparison.
Administrative issueAdministrative issueA stock designated by the exchange because it meets a listing-rule condition such as capital impairment, failure to file a periodic report, or an audit opinion shortfall. Trading is restricted, for example margin trading is prohibited, and if the cause isn't resolved it can lead to delisting.
Listing eligibility reviewListing eligibility reviewA review in which the exchange comprehensively weighs a company's continuity and management transparency when there is doubt about whether it should stay listed, because of embezzlement/breach of trust, audit opinion problems and the like. Trading is suspended during the review, and depending on the result the company can be delisted.
Embezzlement/breach of trust disclosureEmbezzlement/breach of trust disclosureAn exchange disclosure made when suspected embezzlement or breach of trust by officers or employees is confirmed. For executives it is disclosed regardless of the amount; for employees, when the amount is at least a set percentage of equity (5%, lower for large corporations). It appears in the order 'occurrence of suspicion', 'progress' and 'fact confirmation'.
Material uncertainty related to going concernMaterial uncertainty related to going concernA separate paragraph included in the audit report when there is material doubt about the assumption that the company can continue operating. It can be attached even when the audit opinion is unqualified, and in the FSS analysis, 32.1% of listed companies with an unqualified opinion that had this paragraph in fiscal year 2024 were delisted or received a non-clean opinion the next year.
Red flag checklistRed flag checklistA table for checking ten items: consecutive losses, capital impairment, negative operating cash flow, a surge in receivables, frequent CBs and paid-in capital increases, a change of largest shareholder, auditor change or modified opinion, repeated corrected filings, administrative issue and embezzlement/breach of trust. You look at both whether several signals overlap and whether there is a heavy signal.
DilutionDilutionWhen new shares are created, existing shareholders' ownership % and per-share figures (EPS, BPS, etc.) become smaller. Ownership after dilution = my shares ÷ (existing shares + new shares).
Insolvency despite profitsInsolvency despite ProfitsWhen a company that shows profit on its books goes under because it lacks cash on the day debts or payments are due. It tends to happen when trade receivables and inventories pile up and operating cash flow stays negative.
KINDKorea Investor's Network for DisclosureThe listing disclosure system operated by Korea Exchange. Timely exchange disclosures such as supply contracts and preliminary earnings are posted there, and they can also be seen on DART under the exchange disclosure type.
Put what you learned to use right away
Margin Call Calculator→Paid-in Capital Increase and CB Dilution Calculator→This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.