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healthcheck.txt

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+Objective
+This file outlines a structured approach to evaluate the financial health of a company using a set of key financial ratios and metrics. The model will analyze these ratios, apply context-specific logic, and derive a health score on a scale from 1 to 10. This score—known as the QuantiNeuron Health Check Score—serves as a snapshot indicator of the company's current financial viability.
+
+Metrics and Ratios
+1. Liquidity Ratios
+Current Ratio = Current Assets / Current Liabilities
+Interpretation: A ratio between 1.5 and 3.0 is generally considered healthy. Below 1 indicates potential liquidity issues, while above 3 could signal inefficient capital allocation.
+Quick Ratio = (Current Assets - Inventory) / Current Liabilities
+Interpretation: A ratio above 1 indicates that the company can cover short-term obligations without selling inventory, which implies robust liquidity.
+Logic:
+
+If Current Ratio < 1 or Quick Ratio < 0.8, mark as “Weak Liquidity.”
+If Current Ratio is between 1.5 and 3, and Quick Ratio > 1, mark as “Healthy Liquidity.”
+2. Profitability Ratios
+Gross Profit Margin = (Revenue - Cost of Goods Sold) / Revenue
+Interpretation: Indicates core profitability before operational expenses. Higher values signal cost efficiency.
+Net Profit Margin = Net Income / Revenue
+Interpretation: Represents final profitability after all expenses. Higher percentages generally indicate a profitable business.
+Return on Assets (ROA) = Net Income / Total Assets
+Interpretation: Shows how effectively assets generate profit, with values over 5% considered healthy.
+Logic:
+
+High margins and ROA (>5%) indicate strong profitability, labeled as “Strong Profitability.”
+If either margin is consistently low (<5%) over recent periods, flag as “Profitability Concern.”
+3. Leverage Ratios
+Debt-to-Equity Ratio = Total Debt / Total Equity
+Interpretation: A ratio below 2 is typically favorable, as it indicates less reliance on debt.
+Interest Coverage Ratio = Earnings Before Interest & Taxes (EBIT) / Interest Expense
+Interpretation: Values above 3 suggest that the company can comfortably pay its interest expenses.
+Logic:
+
+If Debt-to-Equity < 2 and Interest Coverage > 3, label as “Low Financial Risk.”
+If Debt-to-Equity > 3 or Interest Coverage < 1.5, flag as “High Financial Risk.”
+4. Efficiency Ratios
+Asset Turnover Ratio = Revenue / Total Assets
+Interpretation: High values indicate efficient asset utilization.
+Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
+Interpretation: High turnover rates indicate efficient inventory management.
+Logic:
+
+If Asset Turnover is above industry average and Inventory Turnover shows strong movement, mark as “Efficient Operations.”
+Low turnover rates suggest operational inefficiencies, flagged as “Operational Concern.”
+5. Growth Ratios
+Revenue Growth Rate (year-over-year or quarter-over-quarter)
+Interpretation: Positive, sustainable growth indicates business expansion.
+Earnings Per Share (EPS) Growth = (EPS in current period - EPS in prior period) / EPS in prior period
+Interpretation: Consistent positive EPS growth implies profitability and investor confidence.
+Logic:
+
+Strong growth in Revenue and EPS indicates “Positive Growth,” while negative trends raise “Growth Concerns.”
+Scoring Logic: QuantiNeuron Health Check Score
+To derive a QuantiNeuron Health Check Score (1-10), assign weighted values to each category based on their contribution to financial health. This score is a weighted aggregate that emphasizes profitability and liquidity, followed by leverage, efficiency, and growth.
+
+Step 1: Assign Ratings (1-5) for Each Metric
+
+Based on each metric’s analysis, assign scores:
+5 = Very Strong
+4 = Strong
+3 = Average
+2 = Weak
+1 = Very Weak
+Step 2: Weighted Category Score Calculation
+
+Weight each category:
+
+Profitability: 25%
+Liquidity: 20%
+Leverage: 20%
+Efficiency: 15%
+Growth: 20%
+Calculate weighted scores for each category:
+
+Category Score
+=
+(Category Rating)
+×
+Weight
+Category Score=(Category Rating)×Weight
+Step 3: Aggregate for Final Score
+
+Sum up the weighted scores to derive a total score out of 10.
+Step 4: Determine Health Check Tier
+
+Score 9-10: “Excellent Health” (Low risk, high profitability)
+Score 7-8: “Good Health” (Generally strong but minor areas to improve)
+Score 5-6: “Moderate Health” (Mixed performance; moderate risk)
+Score 3-4: “Poor Health” (Significant concerns in multiple areas)
+Score 1-2: “Critical Health” (Severe financial distress)
+Example Walkthrough
+If the model processes a company and finds:
+
+Liquidity metrics in the healthy range,
+Profitability metrics above average,
+High leverage ratios,
+Efficient operations,
+Moderate growth,
+The model might assign:
+
+Liquidity = 4.5, Profitability = 4.8, Leverage = 2.0, Efficiency = 4.2, Growth = 3.5
+Calculating:
+
+Liquidity Score = 4.5 * 0.2 = 0.9
+Profitability Score = 4.8 * 0.25 = 1.2
+Leverage Score = 2.0 * 0.2 = 0.4
+Efficiency Score = 4.2 * 0.15 = 0.63
+Growth Score = 3.5 * 0.2 = 0.7
+Total Health Check Score = 0.9 + 1.2 + 0.4 + 0.63 + 0.7 = 3.83
+
+Output
+The model will return:
+
+A QuantiNeuron Health Check Score on a 1-10 scale.
+A Health Summary, outlining strengths and weaknesses based on metrics.
+A Recommendation statement, if necessary, for areas needing attention.