While there is no clear cut answer to this, there are at least 2 simple questions you can ask yourself before buying a stock at the very least.
1. How healthy is the cashflow of the company?
Cashflow statements tell us a lot about the fundamentals of a company. In fact, a cashflow statement sometimes tell more than an income statement. For income statement, there are certain inputs such as revenue and costs figures that can actually be ‘manipulated’ to make the income statement look better.
If a company is unable to pay its debt obligations, it signals a potential problem. Just think about this very simply. If the operations of a company cannot even generate sufficient cashflow to pay for its expenses and debts, how is the company even going to continue operating?
2. Is the company currently or in the foreseeable future, likely to face any cyclical or structural challenges?
A company with cyclical problems may still be able to do well at the right seasons so long it has pricing power, but structural issues can mean a more long lasting problem. It may mean that the products of the business is out of favour and demand will only be declining. Such is the case for Nokia which many of us are familiar with.
The point about investing or trading to me is to make money, in a joyful manner with calculated risks taken. If the odds are not in my favour, I would not get into the game. Reddit or other social media platform may have the chance to do this over and over again. Pump and dump groups have not been anything new but we must learn not to be the victim of one and lose our hard-earned money.