Turnover is noise.
Net assets are
the cushion.

Why net assets say more than turnover

Turnover measures activity. It says nothing about whether the activity pays for itself, and nothing about what happens when the bills arrive. Two companies can share the same turnover and have completely different survival prospects: one with £2m of net assets can absorb a bad year, raise finance against its assets, and negotiate from a position of strength. The other, with negative net assets, is already technically insolvent and depends entirely on creditors continuing to wait.

What negative net assets mean

When liabilities exceed assets, the balance sheet shows negative net assets. In law this is the definition of balance-sheet insolvency: the company cannot pay its debts as they fall due out of its own resources. It does not mean the company fails tomorrow. Plenty of companies trade for years with negative net assets, supported by group funding or patient lenders. But it means every creditor of that company is taking a risk that is not covered by the company's own property.

In the R-Score, the asset quality component reads net assets directly: a company with negative net assets scores zero on funding strength, whatever its turnover. You can see the effect on the profiles of real companies with large revenues and thin or negative cushions.

How to read net assets in practice

• Trend over three years. Falling net assets year on year means the cushion is being consumed faster than it is rebuilt.
• Scale against liabilities. Net assets of £50k against current liabilities of £2m is a cushion of days, not months.
• Quality of the assets. Net assets built on goodwill or intercompany debtors are weaker than cash and property, because they are harder to turn into money.
• Combine with cash. Net assets plus the cash coverage ratio tells you both the long cushion and the short one.