Financial Ratio Analysis

The question: does growth improve financial health?

Example Company is a synthetic business, not a market benchmark. We compare three annual forecasts, FY 2026–2028, in EUR thousands. Opening cash is 1,200, receivables 1,000, inventory 800 and PP&E 5,000. Trade payables are 800, long-term debt 3,000 and equity 4,200: assets and funding both total 8,000.

The assumption table below supplies revenue, positive cost inputs, depreciation, capex and closing operating balances. Tax is 25% of positive earnings before tax; annual interest is 5% of opening debt. Other balance-sheet positions, opening revolver, distributions and additional transactions are zero. All receivables and inventory movements are cash movements; no impairment or write-off is assumed.

Read the signals as a group

Revenue rises from 10,000 to 13,200, but gross margin falls from 40% to 35%. EBITDA margin drops from 20% to 13%. The business sells more while retaining less operating profit per euro of sales. Profitability Analysis separates direct costs, overhead and depreciation in this same example.

The current ratio falls from 5.02x to 3.80x; the quick ratio falls more sharply, from 4.02x to 2.05x. Inventory grows from 800 to 2,000 while closing cash shrinks from 2,212.5 to 149.75. Liquidity Ratio Analysis shows why asset composition matters alongside the total.

Debt increases from 3,000 to 3,500, but cash depletion explains much of the increase in net debt: 787.5 becomes 3,350.25. Net debt / EBITDA rises from 0.39x to 1.95x because net debt rises and EBITDA falls. Use Net Debt to EBITDA to distinguish repayment funded by existing cash from repayment funded by operations.

Reconcile the returns and cash

ROIC falls from 18.75% to 6.72%. Normalized NOPAT is EBIT after tax on positive operating profit; the denominator is average opening and closing invested capital. In 2028, NOPAT is 816 × 75% = 612, and average invested capital is (8,460 + 9,756) / 2 = 9,108. The result is 612 / 9,108 = 6.72%.

Receivables, stock and fixed assets absorb capital while EBIT weakens. This explains the arithmetic deterioration in return; it does not identify the commercial cause of higher costs. ROIC owns the detailed capital-return calculation. ROE adds the shareholder perspective using net income and average equity; it is also affected by financing.

The cash warning is clearest in 2027: net income of 712.5 plus depreciation of 700 minus 1,360 absorbed by operating working capital gives CFO of only 52.5. Capex of 1,800 and borrowing of 500 then reduce cash by 1,247.5. Follow the full reconciliation in Cash Flow Analysis.

Recreate the exercise in BalanceCheat

Open the financial model and create a blank annual model named Example Company, starting in 2026, with zero actual years and three forecast years. Select EUR and thousands, then use Advanced mode. Enter the opening balances above in the opening balance sheet; keep all other opening balances at zero.

Enter the table’s amounts in the Income Statement, Balance Sheet and Cash Flow inputs for each year. Costs, depreciation and capex are entered as positive input amounts; statements display expenses and outflows with parentheses. Set gross margin consistently to 40%, 35% and 35%, tax to 25%, and interest to 5% of opening debt. Review Metrics alongside the linked statements. The link opens your model; it does not load this example.

An integrated diagnosis, with boundaries

The combined diagnosis is growth with weaker earnings quality, more capital tied up and less cash headroom. Liquidity still looks substantial on the current ratio, but the liquid portion is shrinking; leverage rises while returns fall. No single ratio captures that combination.

These figures do not establish a universal safe threshold or explain customer demand, inventory salability or debt maturities. Compare consistent periods, accounting policies and cash-flow definitions. The Three Financial Statements explain the underlying links; Financial Model Analysis extends the review to assumptions and scenarios.