Understand the three key financial indicators, avoid pitfalls three months in advance

Have you ever experienced this—today you open your stock trading app, and suddenly a stock plunges 8%? You frantically search news, browse stock forums, ask influencers, trying to find out what exactly happened.

In the end, you might only find a sentence like: “Company performance below expectations” or “Main capital outflow.” Then you wonder: Why am I always the last to know the real reason?

Actually, the true cause is not in today’s news at all.

Operating Cash Flow Greater Than Net Profit

What is operating cash flow? Simply put, it’s the cash the company actually receives from its business operations. Net profit, on the other hand, is a “paper wealth”—it includes IOUs from customers as income; depreciation of equipment is deducted, but no cash is spent.

Why must cash flow be greater than net profit?

Because cash is the lifeblood of a business. If a company’s income statement looks great, earning 100 million yuan a year, but its operating cash flow is only 20 million yuan or even negative—what does that indicate? It means it’s not actually receiving money for what it sold, or all the earnings have turned into inventory and accounts receivable.

If this persists long-term, the company will fall into a strange cycle of “profitable but cashless”: increasing book profits while cash on hand diminishes. When it’s time to repay debts, pay wages, or purchase raw materials, it can only borrow or issue new shares, eventually leading to a cash flow crisis.

Accounts Receivable Growth Rate Should Not Exceed Revenue Growth Rate

What are accounts receivable? They are the IOUs recorded when goods are sold but the customer hasn’t paid yet.

Why is this indicator important? If a company’s revenue grows by 30%, that looks good. But if accounts receivable grow by 60%, what does that mean? It indicates that the company is aggressively loosening credit to boost performance: offering credit before payment, extending payment terms, or even pushing goods onto distributors.

This kind of growth is illusory because the money hasn’t actually been collected.

Even more concerning, these IOUs could turn into bad debts at any time—customers go bankrupt or default, forcing the company to recognize losses all at once, wiping out years of profits.

Moreover, the more accounts receivable accumulate, the less bargaining power the company has downstream, putting it in a passive position.

Gross Profit Margin Significantly Higher Than Peers Without Reasonable Explanation

Is a high gross profit margin a good thing? Not necessarily.

For companies like Moutai (600519), with gross margins over 90%, it’s due to brand premium, scarcity, and long-term moat. But if you run a company producing ordinary products, with an industry average gross margin of 20%, and you achieve 60%—that’s a red flag.

Why is an abnormally high gross margin dangerous? In a highly competitive market, extremely high margins will inevitably attract competitors. If a company consistently outperforms peers with no clear reason (such as exclusive patents, technological barriers, special licenses, or resource monopolies), it’s likely facing financial irregularities.

Common tactics include: inflating revenue (counting unsold goods as sales), underreporting costs (hiding expenses elsewhere), or related-party transactions to boost profits. These manipulations will eventually be exposed. Once regulators or auditors uncover issues, the stock price can plummet sharply.

In summary, remember these three points:

Operating cash flow > Net profit (to verify profit authenticity)

Receivables growth rate ≤ Revenue growth rate (to assess revenue quality)

Gross profit margin aligned with peers, with barriers only in exceptional cases (to prevent financial fraud)