One of Trendlyne's stock screeners looks at companies that show large swings each quarter from profit to loss, identifying companies that show this pattern for three quarters or more. How do these companies perform? Not very well, as per the backtest, underperforming the Nifty500 and delivering negative returns over two years.
Usually, such swings signify an unhealthy balance sheet and cash mismanagement. There maybe non-fraudulent reasons as well - companies in industries with unpredictable revenue streams, such as small, cash-poor firms in the energy sector, where upfront investments required are very high and cash flows unpredictable. Both these cases - mismanagement and unpredictable revenues - can be poison pills for investors looking for stable returns on their investments.
