What the numbers mean

All the money coming in from selling things.

Also called sales or turnover. It is the top line — before any costs, wages, or taxes are taken out. A company can have enormous revenue and still lose money.

Example: A shop that sells $1M of goods has $1M in revenue, even if the goods cost it $1.2M.

What's left after every cost is paid.

The bottom line. Revenue minus all costs, interest and taxes. Negative net income means the company lost money over the period.

Everything the company owns.

Cash, buildings, equipment, inventory, and money owed to it by customers. Assets are what would be left to sell or collect if it stopped trading.

Everything the company owes.

Loans, unpaid supplier bills, and obligations to deliver things already paid for. Not all liabilities are borrowings — a large chunk is often just ordinary trade credit.

What would be left for shareholders.

Assets minus liabilities. If the company sold everything and paid off every debt, equity is what owners would share. Negative equity means debts exceed everything owned.

Actual cash the business generated.

Profit is an accounting figure and involves judgement calls; cash flow is harder to massage. When profit is healthy but cash flow is not, it is worth asking why.

What you pay for each $1 of yearly profit.

A P/E of 20 means investors pay $20 for every $1 the company earns per year. Higher usually means the market expects growth. It cannot be calculated for a company that loses money.

Example: Two firms both earn $1/share. One trades at $10 (P/E 10), the other at $50 (P/E 50).

Cents of profit kept from each dollar of sales.

A 25% margin means 25 cents of every sales dollar becomes profit. Supermarkets run on thin margins; software companies often run on very fat ones. Only compare within an industry.

How hard the company's assets work.

Profit divided by everything owned. Banks look low on this measure by nature, because they hold enormous asset bases relative to their earnings.

Can it pay the bills due this year?

Short-term assets divided by short-term bills. Below 1.0 means more due within a year than readily available to pay it — not automatically a problem, but worth understanding.

Borrowings left after spending all its cash.

Total borrowings minus cash on hand. A company with more cash than debt has negative net debt, which is a position of strength. This is a better measure of debt burden than total liabilities, which include ordinary supplier bills.

Nine checks of whether the finances are improving.

Devised by accounting professor Joseph Piotroski in 2000. It tests profitability, debt levels and operating efficiency, awarding one point per test passed. 8–9 indicates strong and improving financials; 0–2 indicates weak and deteriorating ones. When a company cannot report a figure a test needs, that test is skipped and the score is shown out of a smaller total rather than counting as a failure.

How far the company is from financial distress.

Published by Edward Altman in 1968 to predict bankruptcy. Above 2.99 is the safe zone, 1.81–2.99 is grey, below 1.81 signals distress. WylthIQ uses the original five-factor model for manufacturers and the four-factor Z'' variant elsewhere, because the original was fitted on manufacturing companies. It is not shown at all for banks and insurers — see below.

Screens for signs of manipulated earnings.

Built by Messod Beneish in 1999 from eight ratios comparing this year with last. Above −1.78 flags accounting patterns statistically similar to companies that later restated earnings. It is a prompt to read the filings carefully — never evidence of wrongdoing, and plenty of honest companies trip it.

Our summary of the four health questions.

The average of the profitability, growth, debt and accounting ratings, scored 10 for good, 6 for mixed and 2 for weak. Anything that cannot be assessed is left out rather than guessed. Valuation is deliberately excluded: whether a share looks expensive says nothing about whether the business underneath is sound.