A ‘big red flag’ for ASX investors to avoid at all costs

A business woman looks unhappy while she flies a red flag at her laptop.

A business woman looks unhappy while she flies a red flag at her laptop.

A leading investment manager from Plato Investment Management has warned ASX investors of a “big red flag” that they should avoid on the Australian share market.

Plato Investment Management is a Sydney-based investment management firm that specialises in objective-based global and Australian equity investment solutions. It is majority owned by its investment staff and supported by its minority equity partner, Pinnacle Investment Management Group Ltd (ASX: PNI).

What should ASX investors be watching out for?

According to a release, Plato Investment Management’s head of Long Short Strategies, Dr David Allen, is warning ASX investors that there is a high level of companies on the Australian share market with negative operating cash flow.

The investment company’s research indicates that 28% of ASX shares had negative operating cash flow over the preceding 12 months. This is more than any other country in the MSCI World index.

Dr Allen explains why this is a red flag. He said:

Net income is so easy to manipulate. A company can have negative underlying earnings, but this can be easily manipulated to give a positive result. Unfortunately, in my view this practice is rife, particularly in Australia.

All the historical data suggests over the long term, companies with negative operating cashflow perform very poorly on average.

Don’t let that put you off investing

Dr Allen doesn’t think ASX investors should be put off from investing, though. Rather, they should use this knowledge to avoid investments that could underperform. They could even use it to short shares if they are brave enough! He adds:

In a market with so much negative operating cash flow, investors need to be discerning and those who can sidestep the landmines can be well placed.

On the other hand, it also highlights the benefits of shorting – negative operating cash flow is a powerful red flag that can present great short opportunities.

Food for thought for ASX investors.

The post A ‘big red flag’ for ASX investors to avoid at all costs appeared first on The Motley Fool Australia.

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