The score at a glance
A financially healthy company makes money, can absorb a shock, turns profit into cash, does so steadily and moves forward. Each of these five questions is an area, weighted by its importance for long-term soundness:
Grades| Score | Grade | What it means |
|---|
| 75 – 100 | Strong | First-rate financial profile: profitable, lightly indebted, cash-generative and steady. |
| 55 – 74 | Solid | Sound position with one or two points to watch. |
| 40 – 54 | Mixed | Strengths and weaknesses balance out: read the areas before drawing conclusions. |
| 0 – 39 | Weak | Several warning signs: losses, high debt or negative cash flow. |
The calculation in 5 steps
Collect the official accounts
We read the structured data (XBRL) in annual reports: up to 10 years for US companies, since 2020 for European ones. The score uses the latest year and, for trends, the last five.
Compute each indicator
18 standard financial-analysis ratios, defined below with their exact formula.
Turn each indicator into a 0–100 score
Each indicator has a "weak" threshold (score 0) and a "strong" threshold (score 100), set from the norms used by credit analysts and rating agencies. In between, the score is proportional; beyond, it is capped. An operating margin of 10%, halfway between −5% and 25%, therefore scores 50/100.
Formulascore = 100 × (value − weak threshold) ÷ (strong threshold − weak threshold), capped between 0 and 100
Average within each area
Indicators within an area weigh the same. An indicator that cannot be computed is left out; it is never counted as 0 or 100.
Weight the five areas
Final score = weighted average of available areas (25 / 25 / 20 / 20 / 10), rounded. If available areas carry less than 50% of total weight, we show no score rather than a misleading one.
25%Area 1 of 5
Profitability
Does the company earn a good living?
A profitable company funds its own growth, repays debt and rewards shareholders. We look at profitability at three levels: on sales (margins), for shareholders (ROE) and on all the capital employed (ROIC), so a good figure obtained through debt is not enough on its own.
Operating margin
FormulaOperating income ÷ revenue
What is left of each euro of sales after purchases, wages, marketing and R&D, before interest and tax. It is the most direct measure of pricing power and business-model efficiency. A margin persistently above 20% almost always signals a competitive advantage (brand, patents, network effects).
0 at -5% or less100 at 25% or more
Example : 12% → 57/100
Retailers and traders have structurally thin margins (2–5%): always compare a company with its own sector.
Net margin
FormulaNet income ÷ revenue
The share of sales that actually reaches shareholders after interest, tax and one-off items. The gap with operating margin shows the weight of debt and tax.
0 at -5% or less100 at 20% or more
Example : 8% → 52/100
Return on equity (ROE)
FormulaNet income ÷ average equity (opening and closing)
How much the company earns for every 100 entrusted by shareholders. A ROE of 15% or more, held over time, is the mark of quality businesses. It can be inflated by debt or buybacks, which is why we cross-check it with ROIC and the balance-sheet area.
0 at 0% or less100 at 20% or more
Example : 14% → 70/100
Negative equity scores 0: the company has accumulated more losses (or buybacks) than capital.
Return on invested capital (ROIC)
FormulaOperating income × (1 − effective tax rate) ÷ (equity + financial debt)
Analysts' favourite: it measures the return on all the money tied up in the business, from shareholders and lenders alike. A company only creates value when ROIC exceeds its cost of capital, roughly 7–9% for a large listed company.
0 at 0% or less100 at 15% or more
Example : 10% → 67/100
Effective tax rate is used when between 0 and 50%, otherwise 21%. Not used for banks and insurers.
25%Area 2 of 5
Balance sheet
Can it absorb a shock?
Most failures come not from a lack of profit but from running out of cash at the wrong moment. This area checks that the company can pay its short-term bills, that its debt stays proportionate and that it easily covers its interest.
Current ratio
FormulaCurrent assets ÷ current liabilities
Do assets that turn into cash within a year (inventory, receivables, cash) cover what is due within a year? Below 1, the company relies on future receipts or its banks to meet its obligations.
0 at 0.8× or less100 at 2× or more
Example : 1.4× → 50/100
Some very strong businesses (supermarkets, fast food) deliberately run below 1 because customers pay cash and suppliers are paid at 60 days.
Debt to equity
Formula(Short-term + long-term financial debt) ÷ equity
Gearing: for every 1 of equity, how much has been borrowed? Above 2, shareholders fund only a third of the business and any drop in profit weighs heavily.
0 at 2× or more100 at 0.2× or less
Example : 0.6× → 78/100
When debt is not reported in a usable form, the indicator is left out rather than counted as zero, so an indebted company is never flattered.
Net debt / EBITDA
Formula(Financial debt − cash − short-term investments) ÷ (operating income + depreciation and amortisation)
The bankers' ratio: how many years of operating cash would repay all net debt? Loan agreements often cap it at 3–3.5×. Cash above debt ("net cash") gets the top score.
0 at 4× or more100 at 0.5× or less
Example : 1.8× → 63/100
Interest coverage
FormulaOperating income ÷ interest expense
How many times operating profit covers the interest bill. Below 1.5×, a rate rise or one bad year can stop the company paying its lenders; rating agencies usually want more than 8× for an "A" rating.
0 at 1.5× or less100 at 12× or more
Example : 6× → 43/100
Altman Z''
Formula6.56 × working capital / assets + 3.26 × retained earnings / assets + 6.72 × operating income / assets + 1.05 × equity / liabilities
A statistical bankruptcy-prediction model created by Professor Edward Altman (NYU) and used by banks for decades. The Z'' version relies only on book values, with no share price, and applies across industries. Details below.
0 at 1.1 or less100 at 5 or more
Example : 3.2 → 54/100
20%Area 3 of 5
Cash generation
Do profits turn into real cash?
Profit is an opinion, cash is a fact. A company can report profits while burning cash (growing inventory, late-paying customers, heavy investment). Free cash flow is what is truly left to repay debt, pay dividends or buy back shares.
Free cash flow margin
Formula(Operating cash flow − capital expenditure) ÷ revenue
The share of sales that ends up as free cash. It is often the first figure professional investors look at to value a business.
0 at -5% or less100 at 20% or more
Example : 9% → 56/100
Cash conversion
FormulaFree cash flow ÷ net income (when profit is positive)
An earnings-quality check. Near 1 or above: profits are real. Persistently low: earnings may be flattered by accounting choices, or swallowed by investment worth watching.
0 at 0.3× or less100 at 1.1× or more
Example : 0.95× → 81/100
Years with positive free cash flow (5 years)
FormulaYears with positive free cash flow ÷ years available
One good year is not enough. A company that generates cash four or five years out of five does not depend on financial markets to survive.
0 at 20% or less100 at 100% or more
Example : 80% → 75/100
20%Area 4 of 5
Stability
Are results steady?
Investors pay more for predictability and lenders reward it. A steady business can be planned, financed and better withstands recessions. We measure steadiness over the last five years.
Profitable years (5 years)
FormulaYears with positive net income ÷ years available
The simplest test and one of the most telling: does the company make money every year, crises included?
0 at 0% or less100 at 100% or more
Example : 100% → 100/100
Years of revenue decline (5 years)
FormulaYears with falling revenue ÷ comparable years
Frequently falling sales reveal a cyclical business, lost market share or a fading product.
0 at 60% or more100 at 0% or less
Example : 25% → 58/100
Revenue growth volatility
FormulaStandard deviation of annual revenue growth rates
Growth of +5% every year is more reassuring than swings between +30% and −20%, even with a similar average.
0 at 30 pts or more100 at 3 pts or less
Example : 8 pts → 81/100
Operating margin volatility
FormulaStandard deviation of operating margin over 5 years
A stable margin shows the company passes cost increases on to prices. A see-sawing margin signals high sensitivity to commodities or the economy.
0 at 12 pts or more100 at 1 pts or less
Example : 3 pts → 82/100
10%Area 5 of 5
Growth
Is the company moving forward?
Growth matters, but less than soundness: a company growing fast on borrowed money is not healthy. That is why this area weighs only 10%. We use three-year compound annual rates (CAGR) to smooth out one-off years.
Revenue growth (3-year CAGR)
Formula(Revenue this year ÷ revenue 3 years ago)^(1/3) − 1
Growth above inflation (2–3%) shows the company is genuinely gaining ground.
0 at -3% or less100 at 15% or more
Example : 6% → 50/100
Earnings per share growth (3-year CAGR)
Formula(Diluted EPS this year ÷ 3 years ago)^(1/3) − 1
What matters to a shareholder is not total profit but their share of it. Diluted EPS accounts for new shares issued, so growth paid for with new stock does not fool anyone.
0 at -5% or less100 at 15% or more
Example : 10% → 75/100
Banks and insurers
A bank's business is to borrow (deposits) in order to lend: applying an industrial company's ratios would wrongly make it look over-indebted and illiquid. We detect financial institutions automatically (SEC industry code 6000–6499, or customer loans, deposits or insurance contracts in IFRS accounts) and adapt the grid:
- Left out: ROIC, current ratio, debt to equity, net debt / EBITDA, interest coverage, Altman and the three free cash flow tests.
- Kept: margins, ROE, stability and growth.
- Added for the balance sheet:
Equity / total assets
FormulaEquity ÷ total assets
For a bank, debt is the raw material (customer deposits), so debt to equity is meaningless. What matters is the equity cushion that absorbs loan losses. Basel III requires a minimum leverage ratio of 3%; the strongest institutions exceed 8%.
0 at 4% or less100 at 12% or more
Example : 7% → 38/100
The Altman model (Z'')
Published in 1968 and adapted in 1995 for non-manufacturers and emerging markets, the Z'' score combines four ratios weighted by statistical analysis of failed and healthy companies. In historical tests it flagged most failures within two years of the event.
| Component | Weight | What it measures |
|---|
| Working capital / assets | 6.56 | Liquidity relative to size |
| Retained earnings / assets | 3.26 | Profitability accumulated over the years, hence age and maturity |
| Operating income / assets | 6.72 | How productive the assets are |
| Equity / liabilities | 1.05 | Safety margin before debts exceed assets |
< 1.1Distress zone: high failure risk
1.1 – 2.6Grey zone: caution
> 2.6Safe zone
In our score, 1.1 scores 0/100 and 5 scores 100/100. The model is not applied to banks and insurers.
The Piotroski F-score
Developed in 2000 by Joseph Piotroski (Stanford), this score counts nine simple tests comparing the year with the prior one. Each test passed earns 1 point: 8 or 9 indicates a company improving on every front, 0 to 2 a broad deterioration. We show it on every page under "Risk checks" as an independent second opinion; it does not enter the score out of 100, so the same information is not counted twice.
- ProfitabilityNet income is positive
- ProfitabilityOperating cash flow is positive
- ProfitabilityReturn on assets up on the year
- ProfitabilityOperating cash flow above net income (earnings quality)
- FundingLong-term debt / assets down
- FundingCurrent ratio up
- FundingNo new shares issued (dilution under 0.5%)
- EfficiencyGross margin up
- EfficiencyAsset turnover (revenue / assets) up
Worked example
Take a fictional industrial company whose five areas score as follows:
| Area | Score | Weight | Contribution |
|---|
| Profitability | 72 | 25% | 18.00 |
| Balance sheet | 58 | 25% | 14.50 |
| Cash generation | 81 | 20% | 16.20 |
| Stability | 66 | 20% | 13.20 |
| Growth | 45 | 10% | 4.50 |
| Final score | | 100% | 66.40 → 66 |
The score of 66/100 earns the grade Solid. If growth could not be computed (fewer than 4 years published), the other four areas would be reweighted over 90% and the score would become 69/100.
Data and quality
- United States: 10-K, 20-F and 40-F reports filed with the SEC. Europe: annual financial reports in ESEF format, mandatory since 2020 for companies listed on an EU regulated market.
- Only consolidated group accounts are used, never segment or country breakdowns.
- If a company restates a figure the following year, the restated figure replaces the original.
- Each line item is searched under several accounting tags (US GAAP and IFRS), because companies do not all label them the same way.
- A missing figure is never replaced by zero: the indicator is left out and the rest of the area counts for more.
- Scores are recalculated automatically with every new annual report.
What the score does not say
- It does not say whether the share is expensive. An excellent company can be a poor investment if its price is too high. The score judges the accounts, not the valuation.
- It looks backwards. Annual accounts are published weeks after year-end; a recent event (acquisition, lawsuit, loss of a customer) is not reflected yet.
- It compares with absolute thresholds, not with the sector. A retailer will always have thinner margins than a software company. Use Compare to judge a company against its peers.
- It does not replace reading the report. Every page links to the official document: the notes, off-balance-sheet commitments and management report add essential context.
Scorvest is an information service. The score is neither investment advice nor a recommendation to buy or sell.
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