How to Spot Dilution Risk in Small and Microcaps Stocks

Why it matters

Net-nets can look cheap but blow up on dilution or weak cash quality.

Quick checklist (4 steps)

1) Verify cash quality (no huge receivables; discount inventories if lumpy). 2) Check the quality of inventories, discount heavily if a majority is finished goods 3) Check share changes over 4–8 quarters for dilution trends. 4) Check for any upcoming debt maturities 5) Make sure operating cash flow is not persistently negative.

Red flags to avoid

• Consecutive quarters of share issuance.
• No Insider Buying

What to do next

• Re-run your screen with cash/liability filters.
• Read the latest 10-Q/10-K footnotes on share issuances.