Concept guides
What the measures in the reports mean and how they are calculated, with worked examples produced by the actual calculation engine. Grouped by the same questions as the app menu.
The whole picture
- Altman Z'-Score: formula and interpretationThe Altman Z-Score is a statistical model (Altman, 1968) that combines five financial ratios into a single figure to gauge how likely a company is to fall into distress.
- Piotroski F-Score: a nine-point financial strength checkThe Piotroski F-Score (Piotroski, 2000) grades profitability, leverage and efficiency on nine criteria to show whether financial strength is improving.
How sales moved
- Sales and profit growth: better than last year?Year-on-year growth is the simplest number and usually the first one people look at.
What the business keeps
- Profit margins: what the business keeps from each saleA margin is what is left of each 100 of revenue after each layer of cost.
- ROCE and ROA: what the money put into the business earnsWhether a profit is large or small depends on how much was used to earn it.
- EBITDA: what the business earns before depreciationEBITDA adds depreciation back to operating profit.
- DuPont analysis: splitting ROE into three driversThe same ROE (return on equity) can come from a high margin, from turning assets quickly, or from borrowing more.
How long cash takes to come back
- Profitable but short of cash: why it happensProfit is recorded when a sale is made; cash arrives when the customer pays.
- Cash Conversion Cycle (CCC): formula and interpretationThe cash conversion cycle (CCC) is the average number of days cash stays tied up in operations, from paying for materials or goods to collecting the sales proceeds.
- Days sales outstanding: how long does it take to get paid?Days sales outstanding (DSO) shows the average number of days between making a credit sale and receiving the cash.
- Days inventory outstanding: how long does stock sit before it sells?Days inventory outstanding (DIO) shows the average number of days goods sit in stock before they are sold.
- Current and quick ratios: is there enough to pay what falls due?The current ratio divides current assets (those that become cash within a year) by current liabilities (those due within a year).
Whether the profit arrived as cash
- Free cash flow: cash left after equipmentFree cash flow (FCF) is the cash from operations left after paying for equipment.
Whether the debt is manageable
- Debt-to-equity ratio: how high is too high?The debt-to-equity ratio divides total liabilities by shareholders' equity, showing how much of other people's money the business uses for each unit of the owners' money.
- Interest coverage ratio: can operating profit carry the interest?The interest coverage ratio divides operating profit by interest expense, showing how many times a year's operating earnings cover that year's interest.
Whether these numbers hold up
- Dechow F-Score: an earnings-manipulation risk signalThe Dechow F-Score builds on the 'Predicting Material Accounting Misstatements' model (Dechow et al., 2011).
- Beneish M-Score: eight things that moved out of lineThe Beneish M-Score (Beneish, 1999) combines eight warning signs found in the statements of companies caught overstating earnings into a single score.
Further reading
- Checking a customer's default risk from its financial statementsWhen a customer fails to pay, that revenue becomes a straight loss, and for a small business it can trigger a chain of failures.