To get a high grade in this area, a company should have low financial leverage (assets/equity), high cash-flow coverage (total cash flow/long-term debt), and a high cash position (cash/assets). Also, companies with improving financial health are rewarded, while those with deteriorating health are punished.
Origin
We use the raw numbers in our database, gathered from primary documents such as annual reports, and run them through a proprietary formula. Then we rank companies within their sectors to determine their grades.
Benefit
This grade encapsulates the most important information about a company’s financial health into a single rating, which allows easy comparison between companies.
For the Pros
The financial-health grade consists of two components, which are weighted to arrive at an overall financial-health grade.
Raw Financial Health: We look at financial leverage (assets/equity) from the most recent quarter’s balance sheet, cash on the balance sheet, cash flows, and free cash flows to arrive at a financial-health grade.
Trend: We punish companies with deteriorating financial health.