Heeding Warnings Can Thwart Troubles. (Wall Street's Safety Net - Who Can You Trust?).

IF bankers, merger partners and sophisticated traders all saw fit to advance funds to Enron just weeks before it collapsed, how could an individual investor have foreseen the downfall?

Perhaps there was no way for an outsider to predict the bankruptcy of the eighth-most valuable company in the United States. But in fact, there were plenty of warning signs.

Like Enron, all publicly traded companies are required to provide reams of information to the Securities and Exchange Commission, and investors have access to it for free. Unfortunately, too few put it to use.

"Most investors don't do a thorough analysis to find out all the information that's there," said Tom Veit, executive director of the Center for Financial Reporting and Management at U.C. Berkeley's Hans School of Business.

A 10-K can be intimidating -- some run more than 100 pages -- but these annual financial reports are often filled with warning signs that astute investors can use to spot weaknesses. The quarterly 10Q isn't audited, but it contains information from the most recent reporting period.

There are three main parts to a 10K or 10Q. The income statement, where revenues, profit and losses are reported, is the most widely used measuring stick, but the balance sheet and statement of cash flows also will yield insights into a company's financial health, or lack thereof.

Here are some red flags that experts say should cause investors to pause before buying a stock, or to consider selling if it is already owned.

* Losing money -- If the company is in the red, investors have to say, "Why should I be investing in this organization?" said Veit.

* High valuation -- If a stock has a price/earnings ratio (stock price divided by annual earnings) of 120, it will take 120 years, at current earnings rates, for an investment to be paid back. In today's markets, investors should be wary of investing in a company with a P/E over 50. There may be reasons to buy it at a high price, but not without finding out more.

* Management disclosures -- In a section of the 10K called Management's Discussion and Analysis, company executives must give their assessment of current business conditions. Here is where the company says if its bread-and-butter product is losing ground to a competitor, or it needs to raise $20 million before it can go forward with its ambitious expansion plans.

* Footnotes -- These are often difficult to track, but they contain some of the best information. Enron's off-balance sheet partnerships, for instance -- which allowed the company to record millions in profits that were restated later -- were first disclosed as footnotes. Equipment leases often show up here.

* Rising debt -- The more debt a company has, the riskier it is. One measure is debt as a percentage of total assets. Think of it as the size of your home's mortgage, compared with its total value.

* Decreasing cash flow -- Is the company generating less cash through its operations each year? Is it using up cash? A lot of dot-com companies that went public prematurely failed when they ran out of cash.

* Low R&D outlays - Of particular importance to technology companies is avoiding obsolescence. Companies that don't invest in research and development can't keep up in changing times.

* High receivables -- When accounts receivable grow at a faster rate than revenues, it may mean the company is having trouble collecting from its customers.

* Lack of management credibility -- No matter how much information a company discloses, if its executives are found to be shading the truth in one instance, then all its disclosures are suspect. Investigations by regulators are another signal. "You're going to miss some opportunities if you sell at the first hint of trouble," said one hedge-fund manager. "But overall you'll miss the wipeouts."