Blog · Finance metrics and formulas · Finance and FP&A teams
Compare cash generation, liquidity and interest coverage to investigate operating deterioration. This guide works through historical statements, spreadsheet formulas and the checks that support each finding.
Financial statement analysis and the prediction of financial distress are related, but historical ratios establish warning signs rather than a reliable prediction of failure. Read cash generation, liquidity and interest coverage together, then trace their movement to the underlying reports. The useful output is an evidence-backed list of questions and owners.
Bring the income statement, balance sheet and cash flow statement for the same legal group and fiscal periods. Include the notes, reporting currency and units. A spreadsheet labeled USD thousands must be converted consistently before it sits beside an export expressed in dollars.
The SEC's financial statement guide distinguishes a balance sheet at a point in time from income and cash flow statements covering a period. It also explains why profit and operating cash flow are different. Those distinctions matter here: a strong earnings year does not establish that cash was available when payments fell due.
Use the monthly financial report template to organize the statement sources. Keep annual periods together; compare interim periods with the same prior-year months to avoid turning seasonality into an apparent deterioration.
This illustrative US distributor reports fiscal years ending June 30. All amounts are USD; the figures below are invented teaching inputs, not a named company's accounts. Operating income equals EBIT in this example because there are no other nonoperating income or expense items before interest and tax.
| Fiscal year | Revenue (USD) | EBIT (USD) | Interest expense (USD) | Current assets (USD) | Current liabilities (USD) | Operating cash flow (USD) |
|---|---|---|---|---|---|---|
| 2024 | 10,000,000 | 1,200,000 | 300,000 | 3,200,000 | 2,000,000 | 1,000,000 |
| 2025 | 10,500,000 | 630,000 | 350,000 | 3,000,000 | 2,500,000 | 300,000 |
| 2026 | 10,800,000 | 216,000 | 400,000 | 2,700,000 | 3,000,000 | -200,000 |
These are worksheet columns A through G, with the first company period on row 2. Tie each imported figure to its statement line before adding calculations. Do not replace unavailable figures with zero: a missing interest figure and a company with no interest expense are different situations.
Operating margin = EBIT / Revenue
Current ratio = Current assets / Current liabilities
Interest coverage = EBIT / Interest expense
Working capital = Current assets - Current liabilities
Enter these formulas in H2 through K2 and fill down:
=IF(OR(B2="",B2=0,C2=""),"",C2/B2)
=IF(OR(F2="",F2=0,E2=""),"",E2/F2)
=IF(OR(D2="",D2=0,C2=""),"",C2/D2)
=IF(OR(E2="",F2=""),"",E2-F2)
Format the margin as a percentage and the two coverage ratios as numbers. Calculate with unrounded inputs; the table shows margins to one decimal place and ratios to two decimals.
| Fiscal year | Operating margin | Current ratio | Interest coverage | Working capital (USD) |
|---|---|---|---|---|
| 2024 | 12.0% | 1.60 | 4.00 | 1,200,000 |
| 2025 | 6.0% | 1.20 | 1.80 | 500,000 |
| 2026 | 2.0% | 0.90 | 0.54 | -300,000 |
For 2026, current assets of $2,700,000 divided by current liabilities of $3,000,000 give 0.90. EBIT of $216,000 divided by interest expense of $400,000 gives 0.54. Multiplying 0.54 by $400,000 returns $216,000, which checks the coverage calculation.
This is EBIT interest coverage, not a debt-service ratio or a contractual covenant calculation. It excludes principal repayments. A loan agreement may specify different earnings adjustments, exclusions and testing dates.
CFA Institute's financial analysis techniques separates liquidity, solvency and profitability measures and stresses reading several ratios together. Here the concern is their shared direction: operating margin compresses, the current ratio falls and operating cash flow turns negative.
The cash bridge uses signed cash flows: inflows are positive and outflows negative. Assume no foreign-exchange effect, restricted-cash changes or other reconciling items in this example.
| Fiscal year | Opening cash (USD) | Operating cash flow (USD) | Investing cash flow (USD) | Financing cash flow (USD) | Closing cash (USD) |
|---|---|---|---|---|---|
| 2024 | 800,000 | 1,000,000 | -700,000 | 100,000 | 1,200,000 |
| 2025 | 1,200,000 | 300,000 | -700,000 | 200,000 | 1,000,000 |
| 2026 | 1,000,000 | -200,000 | -600,000 | 300,000 | 500,000 |
With this second table in columns A through F, the check in G2 is:
=F2-SUM(B2:E2)
It must return zero for each row. For 2026, $1,000,000 - $200,000 - $600,000 + $300,000 = $500,000. The company used $500,000 of cash during the year despite a positive financing inflow.
Closing cash fell by $700,000 between 2024 and 2026: $500,000 - $1,200,000. That movement is historical evidence. It does not establish how long the remaining cash will last because future payment dates and receipts are absent.
The controller should explain the margin movement with the sales and expense detail. Treasury should reconcile the financing inflows and upcoming contractual payments. The receivables and inventory owners should establish whether working capital contains balances that are collectible or usable on the expected dates.
For each finding, record the period, source row, explanation requested and owner. Follow the negative operating cash flow into its reconciliation before assuming declining collections caused it. Inventory accumulation, taxes, supplier payments and other movements can produce the same cash result.
If this review is part of a transaction, financial statement analysis in mergers and acquisitions covers the historical target comparison. For a supplier relationship, use the distinct business questions in vendor financial statement analysis.
Upload your comparative statement workbook; Covirage maps the columns, and its tools compute and check the cash, liquidity and coverage figures. The external AI model explains the historical changes with every figure traced to its rows. Create a free Covirage account and bring a sample of your own reports.
See how this fits the work of finance teams.
Start with comparative income statements, balance sheets and cash flow statements, including their notes. Add receivables aging, inventory detail and debt schedules when a trend needs explanation. Match reporting periods and reporting entities before comparing ratios.
Yes. Reported profit can coexist with slow customer collections, inventory purchases, capital spending or debt repayments that consume cash. Compare operating cash flow with income, then reconcile investing and financing movements to the closing cash balance.
No. It means the specified earnings measure is below the interest expense used in that ratio for that period. Cash reserves, payment timing and other circumstances still matter. Investigate the shortfall and the debt documents rather than assigning a failure probability.