H-Score

A predictive measure providing an immediate & reliable evaluation of any company's fundamental financial health

9 out of 10 companies that fail have been identified by the H-Score® in advance

The principal Company Watch measure of financial health is the H-Score®. The H-Score® is derived from a company’s published financial results and quantifies how closely the accounts resemble those of companies which subsequently failed. Displayed graphically over several years, it is a ranking of all companies on a scale of 0 (weakest) to 100 (strongest). Companies with an H-Score® of 25 or less are placed in the Warning Area. Not all companies in the Warning Area will fail, but the stark warning is that the H-Scores of the vast majority of companies that subsequently failed were less than 25 prior to failure.

Seven Measures: The Factor Scores

Seven measures, grouped into three management areas, contribute to the H-Score® evaluation. Their individual scores from 0 to 100 can also be viewed and, together with the H-Score®, form a revealing profile of a company’s strengths and weaknesses over time.

• Profit Management - this measures the contribution that the Earnings are making towards minimising the immediate financial risk in the Balance Sheet
• Asset Management - groups the three components of the H-Score® which measure the strength of the assets, in particular, Liquidity and Working Capital.
• Funding Management - groups the three components of the H-Score® which measure the strength of the Funding, in particular the adequacy of the Capital Base, the dependence on Debt and the dependence on Current Liabilities to fund the assets of the business.

Company Structure: The Factor Scores in Action

For each company, the relative importance of each measure is weighted according to the structure of the Balance Sheet, which in many cases is characteristic of an industry or business type. For example, a different combination of the 7 components is used to measure the financial health of a company with few stocks (a characteristic of service companies) compared to one with high fixed assets to sales (characteristic, among other possibilities, of the property industry).