Financial Strength — Scoring Guide

Financial Strength is a composite of four sub-signals: a point-in-time balance sheet snapshot and three YoY trend analyses. It feeds into the Fundamental dimension of the conviction score.

Data Sources

TTM vs Point-in-Time

Balance sheet items (debt, equity, assets, cash) use the latest quarter (point-in-time). Cash flow items (OCF, FCF, net income) use trailing twelve months (sum of last 4 quarters). This prevents single-quarter anomalies from distorting leverage and coverage ratios.

1. Financial Snapshot (0–100)

Component	Formula	Good → Score
Current Ratio	`(CR - 0.5) * 100`	>1.5 = 100, 0.5 = 0
Debt/Equity	`(1.5 - D/E) / 1.5 * 100`	<0.3 excellent, >1.5 = 0
FCF Yield Proxy	`TTM_FCF / equity * 100 * 5 + 30`	Higher FCF/equity = better
Net Debt / TTM OCF	`(10 - ratio) / 10 * 100`	0x = 100, 10x = 0, net cash = 100
Debt / Assets	`(0.6 - D/A) / 0.6 * 100`	<0.3 strong, >0.6 = 0
Cash / Debt	`ratio * 50`	0 = 0, 1x = 50, 2x = 100
Equity Ratio	`(ratio - 0.1) / 0.5 * 100`	>0.5 strong, <0.2 poor
ROIC	`annualized_ROIC_pct * 4`	0% = 0, 12.5% = 50, 25% = 100

Component

Formula

Good → Score

Current Ratio

(CR - 0.5) * 100

>1.5 = 100, 0.5 = 0

Debt/Equity

(1.5 - D/E) / 1.5 * 100

<0.3 excellent, >1.5 = 0

FCF Yield Proxy

TTM_FCF / equity * 100 * 5 + 30

Higher FCF/equity = better

Net Debt / TTM OCF

(10 - ratio) / 10 * 100

0x = 100, 10x = 0, net cash = 100

Debt / Assets

(0.6 - D/A) / 0.6 * 100

<0.3 strong, >0.6 = 0

Cash / Debt

ratio * 50

0 = 0, 1x = 50, 2x = 100

Equity Ratio

(ratio - 0.1) / 0.5 * 100

>0.5 strong, <0.2 poor

ROIC

annualized_ROIC_pct * 4

0% = 0, 12.5% = 50, 25% = 100

2. Balance Sheet Trend (0–100)

Recency-weighted YoY comparison across 6 metrics. Up to 4 YoY pairs, weighted [0.35, 0.30, 0.20, 0.15] newest to oldest:

Metric	Direction	Interpretation
Current Ratio	Higher = better	Improving liquidity
Debt/Equity	Lower = better	Deleveraging
Net Debt/OCF	Lower = better	Improving coverage
Debt/Assets	Lower = better	Declining leverage
Cash ($M)	Higher = better	Building reserves
Equity Ratio	Higher = better	Strengthening solvency

Metric

Direction

Interpretation

Current Ratio

Higher = better

Improving liquidity

Debt/Equity

Lower = better

Deleveraging

Net Debt/OCF

Lower = better

Improving coverage

Debt/Assets

Lower = better

Declining leverage

Cash ($M)

Higher = better

Building reserves

Equity Ratio

Higher = better

Strengthening solvency

YoY scoring formula
weighted_pct = Σ(weight_i × pct_change_i) / Σ(weight_i)
score = max(0, min(100, 50 + weighted_pct * 2.5))
+20% improvement → 100, 0% change → 50, -20% deterioration → 0

3. Earnings Trend (0–100)

Metric	Direction
Revenue Growth	Higher = better
EPS Growth	Higher = better
Gross Margin (pp change)	Higher = better
Operating Margin (pp change)	Higher = better
Net Margin (pp change)	Higher = better
ROIC (%)	Higher = better

Metric

Direction

Revenue Growth

Higher = better

EPS Growth

Higher = better

Gross Margin (pp change)

Higher = better

Operating Margin (pp change)

Higher = better

Net Margin (pp change)

Higher = better

ROIC (%)

Higher = better

4. Cashflow Trend (0–100)

Metric	Direction	What It Captures
Operating Cash Flow	Higher = better	Core cash generation
Free Cash Flow	Higher = better	Cash after capex
FCF Margin (pp)	Higher = better	Cash conversion efficiency
Cash Conversion Cycle	Lower = better	DSO + DIO - DPO (days)
CapEx Intensity (%)	Lower = better	Less capital required per $ revenue
SBC / Revenue	Lower = better	Dilution discipline
Shareholder Yield	Higher = better	(Buybacks + Dividends) / Revenue

Metric

Direction

What It Captures

Operating Cash Flow

Higher = better

Core cash generation

Free Cash Flow

Higher = better

Cash after capex

FCF Margin (pp)

Higher = better

Cash conversion efficiency

Cash Conversion Cycle

Lower = better

DSO + DIO - DPO (days)

CapEx Intensity (%)

Lower = better

Less capital required per $ revenue

SBC / Revenue

Lower = better

Dilution discipline

Shareholder Yield

Higher = better

(Buybacks + Dividends) / Revenue

Composite Aggregation

composite = average(snapshot, balance_sheet_trend, earnings_trend, cashflow_trend)
if industry_adj ≠ 1.0:
composite = min(100, composite × industry_adj)

Industry Adjustments

Capital-intensive sectors get a lenient adjustment factor (>1.0) because they structurally carry more debt:

Sector	Factor	Effect
Energy	1.15	+15% boost
Utilities	1.15	+15% boost
Industrials	1.10	+10% boost
Financial Services	1.10	+10% boost
Healthcare	1.05	+5% boost
All others	1.00	No adjustment

Sector

Factor

Effect

Energy

1.15

+15% boost

Utilities

1.15

+15% boost

Industrials

1.10

+10% boost

Financial Services

1.10

+10% boost

Healthcare

1.05

+5% boost

All others

1.00

No adjustment

Label	Score
Strong	≥75
Adequate	≥50
Weak	≥25
Distressed	<25

Label

Score

Strong

≥75

Adequate

≥50

Weak

≥25

Distressed

<25

Financial Strength Balance sheet health + three YoY trend signals with sector-aware adjustments

Data Sources

1. Financial Snapshot (0–100)

2. Balance Sheet Trend (0–100)

3. Earnings Trend (0–100)

4. Cashflow Trend (0–100)

Composite Aggregation

Industry Adjustments

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