Key ratios

Lincoln's Financial Health model focuses on 12 key ratios from a potential universe of more than 60. The ratios are combined and weighted to identify the financial risk of each ASX listed company (with the exception of bank and insurance companies).

Key ratios

Ratio	Description	What it measures	Impact on the level of risk
PDACL	Profit before depreciation and amortisation to current liabilities	The margin of safety to meet short term commitments from profits generated	Lower risk companies have a higher margin of safety; higher risk companies have a lower margin of safety.
RPTAI	Retained profits to total tangible assets	The extent of funding from profit retention	Lower risk companies have a higher proportion of their funds sourced from profit retention. A high value indicates a mature company with a history of good profits and a conservative dividend payout ratio
TLTAI	Total liabilities to total tangible assets	The gearing ratio: the relationship between liabilities and tangible assets	The higher the value, the higher the level of risk because the more a company borrows, the more susceptible it is to financial difficulties in the event of downward trading.
CBTL	Cash balance to total liabilities	The amount of cash the company has to meet total debt commitments	The lower the value the higher the level of risk as a company is susceptible to a profitability fall if it has low cash reserves, making it harder to meet its commitments.
CATAI	Current assets to total tangible assets	The efficiency in the management of stock and/or debtors, and the backstop of fixed assets available as a source of funds, either via sale or mortgage.	Lower risk companies have a lower value because they turn over stock faster and/or collect debtors quicker, and/or have reserves of longer-term assets.
QLCL	Quick liabilities (current liabilities – short term bank finance) to current liabilities	The relationship between trade and short-term bank finance. The lower the value, the higher the level of risk, as there is a limit to the amount of short-term funds available from a bank.	The closer a company gets to their short-term funding limit, the less likely additional funds will be available, if required.
QACA	Quick assets (current assets – stock) to current assets	A company’s immediate liquidity	The higher the value, the lower the level of risk because the company has more claims to immediate liquidity than the industry norm.
CLTL	Current liabilities to total liabilities	The extent of core, pressing debt commitments.	The higher the value, the greater the risk. Higher risk companies have more of their borrowings short term than is normal for the industry.
CBTA	Cash balance to total assets.	The relative levels of cash the company has to meet its commitments.	The higher the value, the lower the risk as this ratio is an indicator of the company’s cash position needed to fund and maintain its asset base.
OCFTAI	Operating cash flow to total tangible assets	The relative cash the company generates from its operations	This ratio measures the level of cash flow from a company’s operations, which will ultimately be used to fund operations and meet its commitments. The old saying “Asset rich, cash poor” can apply to companies as well, therefore cash flow needs to be sufficient to meet the business’ needs.
CTCCL	Change in cash balance to current liabilities	The rate of change of a company’s cash balance	This ratio measures the change in the total cash balance as a proportion of its short-term commitments, that can be called upon within 12 months. A deteriorating cash balance may mean a company will have trouble meeting future commitments.
OCFCL	Operating cash flow to current liabilities	The amount of cash a company receives each year from its operations to cover current liabilities.	This ratio measures the level of cash flow from a company’s operations, which will ultimately be used to fund its short-term commitments. Lower risk companies have a higher margin of safety; higher risk companies have a lower margin of safety.