How to Assess Your Company's Financial Health in 5 Minutes

Key Questions This Answers

• How do you assess company financial health quickly?
• What are the most important financial metrics to check?

Quick Answer

You only need three numbers: gross margin trend, current ratio, and DSO direction. If margin is declining, ratio is below 1.0, and DSO is rising — the company is in trouble regardless of what the headline numbers say.

You don't need a 40-page report to know if a business is in trouble. You need the right three numbers — and you need to know what to do with them.

The 3-Signal Framework

Signal 1: Profitability (Is the business model working?)

Look at gross margin. Not net income — gross margin.

• Above 40%: Healthy for most sectors
• 20–40%: Acceptable, watch the trend
• Below 20%: The business model is under pressure

If gross margin is declining quarter over quarter, the company is losing pricing power or absorbing cost increases it can't pass on to customers.

Signal 2: Liquidity (Can the business survive a shock?)

Current ratio = Current assets ÷ Current liabilities

• Above 1.5: Strong
• 1.0–1.5: Acceptable
• Below 1.0: The company can't cover its short-term obligations

Pair this with cash on hand and runway. A company with a current ratio of 0.8 and 4 months of runway is in serious trouble regardless of what the P&L shows.

Signal 3: Growth Quality (Is revenue real?)

Revenue growth means nothing without cash conversion. Ask: is revenue turning into cash, or into receivables?

• DSO increasing: Customers aren't paying — revenue is fiction until collected
• Repeat revenue percentage: One-time deals hide declining businesses
• Burn multiple: How much are you spending to generate each SAR of new revenue?

The 5-Minute Assessment

Do this once a month, per company:

1. Pull the last 3 months of gross margin — is it stable or declining?
2. Calculate current ratio — is it above 1.0?
3. Check DSO trend — is it getting longer?
4. Calculate runway — is it above 9 months?
5. Check if top-line growth is coming from new or returning customers

If 3 of these 5 signals are negative, the company needs attention now.

In practice, tools like Datrix run this assessment continuously across every company in a portfolio — turning a manual monthly review into an always-current dashboard.

What Most Reports Miss

Most financial reports are backwards-looking. They tell you what happened last quarter. By the time a problem shows in a standard report, it's already 60–90 days old.

The investors who catch problems early aren't smarter. They're looking at the right signals, more frequently.

FAQ

What's the fastest way to assess financial health?

Three numbers in five minutes — gross margin trend, current ratio, and DSO direction. If all three are negative, the company needs immediate attention regardless of revenue or net income.

Why is gross margin more important than net income?

Net income can be inflated by one-time events and accounting choices. Gross margin reflects the underlying business model — pricing power minus cost of goods sold. It's much harder to fake.

What current ratio is too low?

Below 1.0 means the company can't cover its short-term obligations from current assets. Below 1.2 is concerning unless the business has highly predictable cash flow (e.g. SaaS with strong contracted MRR).

How long should DSO be?

Industry-dependent, but the trend matters more than the absolute number. DSO rising over 3 consecutive months is a red flag regardless of the starting point.

What's a healthy burn multiple?

Burn multiple = net burn ÷ net new ARR. Below 1.0 is excellent. 1.0–2.0 is acceptable for early stage. Above 3.0 means you're spending too much to grow.