Eight ways to quickly gauge the health of a company

Entrepreneurs, investors, buyers, suppliers, lenders and more – across the business community it’s handy to know whether or not the companies you’re dealing with are in a healthy state. A flashy website, sparkling new sign and a fleet of the latest cars doesn’t always tally with the numbers, nor what goes on behind the scenes.

With an online platform like Qynn, it’s possible to assess a company’s long-term performance by zeroing in on key business data. The process only takes a few minutes, but can quickly help you decide whether to follow up with a new potential partner, customer or supplier; whether further due diligence might be necessary; or perhaps whether to walk away.

Here are eightkey indicators that are at your fingertips on Qynn...

1 - A strong cash balance

When it comes to running a business, there’s nothing like having ready money. A large bank balance means that a firm is probably flexible and resilient. It will be able to respond to new market opportunities or adverse market conditions quickly, and might not even need to extend its borrowing. But that’s not the entire story. If the balance has grown steadily over the years,that’s an even better sign.

2 - Improving P&L statement

Similar to a company’s cash balance, its profit and loss statement is likely to vary year on year and will be affected by market conditions in the company’s sector. When the latest statement is in positive territory, that’s a welcome sign, but once again it is steady and sustained growth over the company’s history that really matters.

3 - High asset to debt ratio

Points one and two will give an initial feel for how steadily a company is being run, and will sort the rising stars from those that are ticking over or stagnating. But a quick look at the balance sheet will put everything into context. Firstly, a company might not look quite so cash-rich if its bank balance is only a small fraction of its total assets. Secondly, even when there is lots of cash in the bank, if liabilities have been rising at a faster rate there could be trouble ahead.

A good indicator of stability is a high net asset to net liability ratio. This will certainly vary from market to market and in capital-intensive industries the ratio is often narrower, particularly while a company is still young. Qynn has produced an indicator of financial health and wellbeing for each of the five million-plus listed companies within our database. The Qynn Score provides a quick assessment of the debt <> asset ratio – numbers 100>51 indicate a positive balance sheet, 50 is cash neutral and numbers 49 > 0 indicate a negative balance sheet. Qynn also provides in depth analysis of each of the company’s major financials groups which can be found in the financial tab.

4 - Low liability to net worth ratio

Another ratio that can be quickly calculated by looking at the Summary page for a company on Qynn. A timeline will appear for any company you search for showing you the Total Assets in blue, the Total Liabilities in red and the Net Worth in green over the years. If the area coloured green is clearly larger than the red, the signal is ‘go’.

For any given year, divide the total liabilities by the net worth for the company’s debt-to-equity ratio. The lower the better, and below 0.5 indicates strong performance. To an analyst, this means that investment in the company is what’s keeping it going, rather than borrowing. Shareholder investment doesn’t cost a company anything, but corporate borrowing always involves interest.

5 - Creditors higher than debtors

On the surface, this one is pretty self-explanatory. It can be quickly charted on the Risk page for any company listed in Qynn. Most organisations sell goods and services to their clients on account, with creditors owing the company money, and debtors who must be paid off. If the money owed to the company at the end of the year is greater than what it needs to pay out, that’s a good sign. Double or more is a healthy sign, and it generally means that although a company may be exposed to non-payment it’s likely to be able to pay its expenses without extending its liabilities. Companies relying on high turnovers and low margins might cut it finer but still be profitable in their area.

6 - People

Sometimes, due diligence is a qualitative as well as a quantitative process. The numbers are often black and white, but a company’s prospects often depend on who’s running it. With Qynn it’s possible to see who a company’s directors are in just a few clicks. Current and previous directorships can all be tracked, and it’s easy to determine whether a director has moved around a lot and whether or not the companies they’ve worked with have prospered. Additionally, each company and director is given a Qynn rating out of a hundred. A score over 50 means they are likely to meet their liabilities, and a score of 100 makes it almost certain.

7 - Holding and related companies

Usually, the directors of a company are also on the boards of associated holding companies and parent companies. By clicking on the name of a director, their other concerns can be investigated – simply click on any of the companies listed and data for that company will be instantly accessible. The figures for holding companies often look quite innocuous, however if any associated company has a high level of debt or a series of charges against them, this may have a bearing on the future performance of subsidiaries. The ability to provide business intelligence on one company in relation to others is one of Qynn’s strengths.

8 - Sector

Context is always important. While there are plenty of general rules to follow when considering liability to net worth or asset to debt ratios, it’s always worth looking at how a company is doing in the context of its sector and its competitors. Qynn’s machine learning algorithms mean it can identify a company’s close competitors, and by clicking the Competition tab after analysing the data on a particular concern it’s possible to then measure the company up against others like it. This can be done at local and national level, and the net worth for each competitor is listed making it easier to compare like with like.

Using the Analytics section of Qynn, soon it will be possible to pull together data from a selection of companies for close comparison to form a better picture of the health of a specific firm, and gauge the sustainability of its operating environment.