7 Signs of a Bad Company

Bad companies don’t always look bad. Sometimes they seem very promising. Here’s what to look for.

1. Profits are unstable

A company may show growth, but its profits fluctuate wildly from year to year.

Example:

• Uber - it grew for a long time, but went years without stable profits.

2. There’s growth, but no money

Revenue is growing, but profits aren’t materializing.

Example:

• Snap Inc. - it has user growth, but no sustainable profits.

3. Constant additional share issuances

The company regularly issues new shares → the investor’s stake decreases.

Example:

• Palantir Technologies - for a long time, it actively diluted shareholders’ stakes through stock-⁠based compensation.

4. Debt is growing faster than the business

Growth is fueled by borrowed money.

Example:

• WeWork - aggressive expansion fueled by debt led to the collapse of the business model.

5. No clear competitive advantage

The company cannot explain why it will be stronger than its competitors in 5-⁠10 years.

Example:

• Blue Apron - the business model is easily replicable, and margins are falling.

6. Lots of promises, little profit

Management sells the “future,” not current results.

Example:

• Nikola Corporation - big talk, but little substance.

7. Everyone’s talking about it

When a company becomes a “trendy idea,” you often arrive too late.

Example:

• Zoom Video Communications - in 2020, the business grew sharply amid the pandemic, but the market priced in overly optimistic expectations. When growth normalized, the stock fell sharply.

Key takeaway