You need only a modicum of patience, access to a company's financial reports over two or three years and a little guidance to find potential warning flags of pending trouble.

You usually won't find the valuable nuggets in the earnings statement. They mostly lie buried in the dense ore of the balance sheet and the footnotes.

Bob Olstein, a money manager and former securities analyst, shuns or sells shares of stock in companies with these characteristics, all of which can be determined from the financial statements:

Occasionally, a corporation's outside public accountants will direct you to signs of trouble. The law requires a letter from the accountants to appear in the annual report, stating whether the company has adhered to generally accepted accounting principles in preparing the report.

Exceptions to those principles amount to a big red flag. But most corporations do adhere to the accounting principles. Those rules allow a lot of discretion in accounting for sales and expenses. Here are the critical items to look for:

It represents taxes that may have to be paid in the future, when income already reported to shareholders becomes taxable income. In theory, sales and expenses shown on shareholder reports give investors a better overall picture of a company's business. But reporting sales and expenses as told to the IRS usually reveals a better picture of real current resources, such as cash flow.

Companies often report lower earnings to the IRS than they do to their shareholders. The tax law allows, among other things, larger deductions for expenses such as depreciation, or the wearing out of equipment and buildings, than are shown on financial reports to shareholders. Thus, the allowance for income taxes shown on shareholder reports can be greater than the amount actually owed to the IRS. The difference, called deferred income taxes, appears as a liability on the balance sheet.

Footnote 9 in Medaphis' original 1995 report, explaining deferred taxes, showed that the company paid no income taxes to the IRS.

There's nothing necessarily wrong with deferred taxes, unbilled accounts receivable or intangible assets. Medaphis reported them in exactly the same way that many other companies do. Intangible assets can represent valuable investments. Deferring taxes or counting as an asset expenses that haven't yet been offset by matching sales, but probably will, can give a reader a more realistic picture of a company's business and prospects than all-cash accounting.

Still, when statement after statement continually pushes current expenses into the future, it means one thing: A larger and larger amount of the company's cash is being depleted with the hope of replenishing it from sales in the inherently dicey future.

The 1995, Medaphis Corp. annual report showed a $74.2 million asset called "unbilled accounts receivable."

At best, unbilled accounts receivable represent goods or services for which a company will be paid, but which the company hasn't billed. Still, Olstein says, it's often "a sure sign of an upcoming squeeze." Why haven't those sales been billed? Have the customers really agreed to pay?

In Medaphis' case, U.S. customers, squeezed by high health care operating costs, delayed their payments, driving harder bargains with Medaphis or taking their business elsewhere. In addition, a German venture by one of the companies it had acquired lost a large chunk of business that Medaphis had counted on.

At worst, unbilled accounts receivable can represent sales that will materialize only in the best of all possible worlds. Say you've talked with Widgetronics, and it's interested in buying a zillion dollars worth of your gadgetry next year. Well, tote those hopes up under "unbilled accounts receivable." Makes your future look nice. Never mind that Widgetronics may change its mind. Never mind that Widgetronics may run out of cash.

Footnote 4 in Medaphis' 1995 report showed $61.6 million in intangible assets. For 1994, the company showed only $26 million in intangible assets.

In this case, the figures show what the company spent on software to manage its customers' medical practices and hospitals. Instead of deducting that spending from income, as an expense, it avoided the damage to earnings by categorizing software spending as an asset, albeit it an "intangible" one, its cost to be deducted over a period of years.

The sharp rise in intangible assets, combined with zero income for income tax purposes, tells a dramatic story: The company was spending increasingly large amounts of cash on software, but sales increases and cash receipts weren't keeping pace.

It's possible to derive some revealing ratios from certain published figures. Changes in these ratios can point to changes in the drift of a company's business that earnings statements often fail to show.