You have an exciting investment.
The numbers look bad.
You need to say no.
You need red-flag awareness.
Investment red flags. Warning signs. Rejection criteria. Your protection.
This guide shows you how.
Red-flag identification. Metric evaluation. Decision framework. Your safety.
Read this. Identify red flags. Say no when needed.
Key Takeaways
- Negative NPV—if Net Present Value is negative, the investment destroys value
- Low IRR—if Internal Rate of Return is below your required rate, it's not worth it
- Negative ROI—if Return on Investment is negative, you lose money
- Long payback—if payback period is too long, cash is tied up too long
- High risk, low return—if risk is high but return is low, avoid the investment
Table of Contents
Why Red Flags Matter
Red flags prevent losses.
What happens without red-flag awareness:
- Bad investments are made
- Money is lost
- Resources are wasted
- Business suffers
What happens with red-flag awareness:
- Bad investments are avoided
- Money is protected
- Resources are preserved
- Business thrives
The reality: Red flags enable protection.
Negative NPV
Negative NPV is a red flag:
Calculate NPV
Calculate it:
- Use our Net Present Value Calculator
- Enter investment details
- See NPV result
Why it matters: Negative NPV shows value destruction.
What Negative NPV Means
What it means:
- Investment destroys value
- Future cash flows don’t cover cost
- Better alternatives exist
- Should be rejected
Why it matters: Understanding prevents bad decisions.
When to Say No
When to reject:
- NPV is negative
- NPV is very low
- NPV doesn’t meet threshold
- Better opportunities exist
Why it matters: Rejection prevents losses.
Pro tip: Check NPV. Use our Net Present Value Calculator. Negative NPV is a red flag.
Low IRR
Low IRR is a red flag:
Calculate IRR
Calculate it:
- Use our Internal Rate of Return Calculator
- Enter investment details
- See IRR percentage
Why it matters: Low IRR shows poor return potential.
What Low IRR Means
What it means:
- Return is below required rate
- Better alternatives exist
- Opportunity cost is high
- Should be rejected
Why it matters: Understanding prevents poor decisions.
When to Say No
When to reject:
- IRR is below discount rate
- IRR is below required return
- IRR is much lower than alternatives
- Risk-adjusted IRR is too low
Why it matters: Rejection preserves capital.
Pro tip: Check IRR. Use our Internal Rate of Return Calculator. Low IRR is a red flag.
Negative ROI
Negative ROI is a red flag:
Calculate ROI
Calculate it:
- Use our ROI Calculator
- Enter investment and return
- See ROI percentage
Why it matters: Negative ROI shows money loss.
What Negative ROI Means
What it means:
- Investment loses money
- Return is less than cost
- Capital is destroyed
- Should be rejected
Why it matters: Understanding prevents losses.
When to Say No
When to reject:
- ROI is negative
- ROI is very low
- ROI doesn’t meet threshold
- Better opportunities exist
Why it matters: Rejection prevents losses.
Pro tip: Check ROI. Use our ROI Calculator. Negative ROI is a red flag.
Long Payback Period
Long payback period is a red flag:
Calculate Payback Period
What payback period is:
- Time to recover initial investment
- Years until cash flow positive
- Time until break-even
- Recovery timeline
Why it matters: Long payback ties up capital.
What Long Payback Means
What it means:
- Cash is tied up too long
- Opportunity cost is high
- Risk increases over time
- Better alternatives exist
Why it matters: Understanding prevents poor decisions.
When to Say No
When to reject:
- Payback is too long
- Payback exceeds threshold
- Payback is longer than alternatives
- Cash flow needs are urgent
Why it matters: Rejection preserves flexibility.
Pro tip: Check payback period. Long payback is a red flag. Consider opportunity cost and cash flow needs.
High Risk, Low Return
High risk with low return is a red flag:
Evaluate Risk-Return Balance
What to evaluate:
- Risk level of investment
- Expected return level
- Risk-return ratio
- Risk-adjusted return
Why it matters: Balance determines worthiness.
What Poor Balance Means
What it means:
- High risk without high return
- Poor risk-adjusted return
- Better alternatives exist
- Should be rejected
Why it matters: Understanding prevents poor decisions.
When to Say No
When to reject:
- Risk is high, return is low
- Risk-adjusted return is poor
- Better risk-return alternatives exist
- Risk tolerance is exceeded
Why it matters: Rejection preserves capital and sanity.
Pro tip: Evaluate risk-return balance. High risk with low return is a red flag. See our investment triage framework guide for comprehensive evaluation.
Your Next Steps
Calculate metrics. Identify red flags. Say no when needed.
This Week:
- Review this guide
- Calculate NPV, IRR, and ROI for investments
- Identify any red flags
- Make rejection decisions
This Month:
- Build red-flag checklist
- Apply to all opportunities
- Avoid bad investments
- Preserve capital
Going Forward:
- Always check red flags
- Use calculators before investing
- Say no when metrics are bad
- Protect your business
Need help? Check out our Net Present Value Calculator for NPV calculation, our Internal Rate of Return Calculator for IRR calculation, our ROI Calculator for ROI calculation, and our investment triage framework guide for comprehensive evaluation.
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Sources & Additional Information
This guide provides general information about investment red flags. Your specific situation may require different considerations.
For NPV calculation, see our Net Present Value Calculator.
For IRR calculation, see our Internal Rate of Return Calculator.
For ROI calculation, see our ROI Calculator.
Consult with professionals for advice specific to your situation.
