4. Fundamentals and earnings

Red and green flags (DIAG)

DIAG turns a company's filings and numbers into a short verdict and lists of red flags, green flags and items to watch, each with the fact, a reading and its source filing.

5 min
3 questions
Lesson 3 of 5

Why you would care

What should worry you, or reassure you, about this company? A 10-K is often more than 100 pages. The warning signs hide in footnotes: a big guarantee, a customer that pays slower and slower, profits that never turn into cash. Analysts call this forensic accounting: reading the numbers for trouble. DIAG gives you a first pass and points you to the page.

The idea from scratch

A red flag is a fact that could signal a problem. A green flag is a fact that signals strength. Neither is a verdict on its own.

Classic red flags, in plain words:

Red flag	Why it worries analysts
Receivables growing much faster than sales	Customers are paying later, or sales are being pulled forward
Profit up, operating cash flow flat or down	Profit that does not become cash may not be real
Inventory piling up	Products may not be selling
Lots of new shares issued	Each existing share owns less (dilution)
A change of auditor, a late filing, a restatement	The books may need fixing
Big guarantees or off-balance-sheet obligations	Hidden debts that appear only if something goes wrong
Large one-off gains in profit	The "beat" may not repeat

Green flags: strong cash generation, falling debt, steady margins, profits consistently above cash costs, shareholder returns paid from cash flow.

How DIAG builds its read

DIAG is generated automatically by a language model that reads the latest filings and statement numbers. Each item has:

Observed: the fact, with numbers.
Reading: what it may mean.
a confidence score and the source (a 10-Q, an 8-K, a statement), which you can open.

Diagram: Filings: 10-K, 10-Q, 8-K leads to Automated read; Statement numbers leads to Automated read; Automated read leads to Verdict + red flags, anomalies, green flags, watch items; Verdict + red flags, anomalies, green flags, watch items leads to Each with evidence: open the source.

See it in Gloom

Gloom screenshot: DIAG NVDA: a one-word verdict, a summary, then red flags, each with what was observed, a reading, a confidence score and its source filing — DIAG NVDA: a one-word verdict, a summary, then red flags, each with what was observed, a reading, a confidence score and its source filing. Historical example.

open ittype DIAG NVDA. o opens the source of the selected item.

Balanced NVIDIA Corporation · confidence 91%: the overall verdict and how confident the read is.
The summary paragraph: strengths (growth, profitability, cash) against risks (investment volatility, a lease guarantee, valuation).
RED FLAGS, MEDIUM Material exposure to investment-market volatility: severity and title.
Observed: 51.2 billion of investments and advances, 12.5 billion of unrealized gains. Reading: those gains may not be durable operating income.
94% confidence · Quarterly financial statement 2026-07-26 · 10-Q filed 2026-08-26: where it came from, with a link.
Second flag: a lease guarantee from an 8-K, whose maximum cost the filing does not quantify.

Practice and recap

Try it3 tasks

In the screenshot, which flag comes from an 8-K, and what is an 8-K? (The lease guarantee; an 8-K is a notice of an important event.)
Why might "unrealized investment gains" be flagged even in a strong company? (They are paper gains that can reverse; they are not profit from selling products.)
Take Lemonade Co. from The three financial statements: net income 180, operating cash flow 210. Red or green flag? (Green: cash is above profit.)

Common mistakes4 mistakes

Reading one red flag as "sell". Every company has some; severity and trend matter.
Skipping the source. The filing often explains the context.
Trusting the confidence score as a probability of being right.
Ignoring green flags. Balance is the point.

Check yourself3 questions

Name two classic red flags.
What is dilution?
What three parts does each DIAG item show?

Answers

Any two: receivables outrunning sales, profit without cash, inventory build-up, heavy share issuance, auditor change or restatement, hidden guarantees, one-off gains.
New shares being issued, so each existing share owns a smaller part of the company.
What was observed, a reading of what it may mean, and its source with a confidence score.

Words in this lesson7 words

red flag / green flag: A fact that may signal a problem / strength.
forensic accounting: Reading financial statements for warning signs.
receivables: Money customers owe for sales already made.
dilution: Each share owning less because new shares were issued.
restatement: A company correcting financial statements it already published.
unrealized gain: A paper gain on something not yet sold.
guarantee (contingent obligation): A promise to pay if something goes wrong; a hidden potential debt.

Educational material about reading market data, not investment advice.