The process · Step 3 of 6
Financial traffic-light
Are the balance sheet, cash flow and margins robust?
Why this step
Financial metrics are rarely clearly good or bad — they depend heavily on sector, growth phase and business model. The traffic-light logic makes this context-dependence visible instead of reducing everything to a single, often misleading metric. Important: red is a reason for deeper review in steps 4 and 5, not an automatic exclusion as in step 2.
The six metrics
- Equity ratio — share of equity in total assets.
- Net debt / EBITDA — years of operating result needed to repay debt.
- Free-cash-flow margin — free cash flow relative to revenue.
- EBIT margin — operating result relative to revenue.
- Interest coverage — operating result relative to interest expense.
- Working-capital trend — inventories/receivables relative to revenue growth.
Result
Read each metric as green (solid range), yellow (must be plausibly explainable in context) or red (reason for cross-check in steps 4 & 5) — never a metric in isolation.
Typical mistakes
- Looking at a single red metric in isolation instead of in interplay with the other five.
- Misreading sector-typical patterns as a warning sign.
- Checking only the latest value instead of the trend over several periods.
Example logic
Example (no reference to a real company): A young exploration company shows red free-cash-flow and EBIT margins (expected without production revenues) but a green equity ratio and green net debt/EBITDA. The red values are plausible here — the critical question shifts to step 4.
Frequently asked questions
Does a red metric automatically mean exclusion?
No. Unlike the stop-or-go check, red is a reason for deeper review, not an automatic exclusion criterion.
Should the ranges be adjusted by sector?
Yes — capital-intensive or early-cyclical sectors require adjusted, less strict interpretations for certain metrics.
How many green metrics are needed for a positive assessment?
There is no fixed minimum — what matters is whether red/yellow values are plausibly explainable in context.