How do you analyze a company's health in 5 minutes?

Step two: the margin ladder

Read down the income statement and it hands you three profit lines: gross profit, operating profit, net income. Turn each one into a percentage of revenue. That is your ladder.

A banker adds a fourth rung, EBITDA margin, which is operating profit with the paper charges added back. The reason to bother is comparability. Two companies can run the same business while owning very different amounts of equipment, and EBITDA strips that accounting difference out, which lets you compare the operations head to head.

Where the money leaks between the top line and the bottom line tells you what kind of business you are holding. Ground every rung against peers or against the company's own history. Never against zero. A 3% net margin is a disaster in software and a triumph in grocery. The full ladder is here, including the traps interviewers set on it.

Step three: cash conversion

This is the spine of the whole checklist, and it is the step that caught Enron. Put free cash flow next to net income and look at both across several years.

Net income is an opinion. Cash is a fact.

Profit and cash run on different clocks. Net income counts revenue when it is earned. Cash counts when the money actually moves. That gap is why "why would a company be profitable but have negative cash flow?" is a real Super Day question at Bank of America, and why the follow-up trips people up: yes, it goes the other way too. Heavy depreciation or a big write-down can put a company in the red on paper while cash climbs.

Netflix in 2019 reported about $2 billion of profit and lost more than $3 billion of actual cash in the same year. Both numbers were true. Content spend hit the cash flow statement years before it hit the income statement, and debt funded the gap. The model matured and free cash flow is strongly positive today. Same company, same statements, a different verdict in each year, and the checklist catches both.

The pattern to watch is the one McLean saw at Enron. Earnings up, cash not following, debt growing. When net income and free cash flow diverge for years, something in the model is off. Sometimes it is accounting. Sometimes it is fraud. The numbers will not tell you which. They tell you where to dig.

Kill one trap while you are here. People say EBITDA is basically cash flow. It is close and it is not equal, because EBITDA ignores capex, working capital, interest and taxes. Netflix was EBITDA positive the entire time it was burning cash.

Step four: leverage

So the business makes money and the money is real. Next question: who has first claim on it?

When a company earns a dollar of cash flow, the owner cannot simply take it out. Lenders get paid first, every single time. Leverage tells you how much of the cash flow is already spoken for before the owners see a dime.

It comes down to one number. Net debt over EBITDA, which is roughly how many years of earnings it would take to pay off all the debt. As a rule of thumb, one to two times is conservative and four times or more is pretty aggressive. Net debt is total debt minus the cash on hand, so a company sitting on a big cash pile carries less real leverage than the gross figure suggests.

At Enron the entire earnings story was funded by debt. As it unraveled, the lenders collected on the cash first and the shareholders were left with very little, and in plenty of cases nothing at all. The same priority waterfall sits underneath an LBO.

Step five: liquidity

Leverage is the long-run question. Liquidity is the short-run one. Can the company cover the next twelve months?

The check is simple. Cash on hand plus the revolver, which is the company's credit line and works about like a credit card, against everything that comes due inside a year.

This is how a company actually dies. The bills come due and there is no cash to pay them. That is the event. A bad quarter will not do it on its own. Neither will thin margins, or a floor full of people you cannot stand.

Liquidity tells you whether a company survives a bad year. Everything else on the checklist tells you whether it thrives in a good one.

The 60-second answer

Cold conference room, Super Day. The MD walks in, drops a 10-K on the table, gives you five minutes, and tells you to report back on the health of the business. Here is the whole thing, out loud, in five moves.

One, revenue. How fast is the business growing, and is that growth durable? If the top line is weak or fading, everything underneath it is fighting uphill. Weak revenue is the first sign of a sick business.

Two, the margin ladder. Three numbers. Gross margin is what is left after making and selling the product. Operating margin is what is left after running the business. Net margin is what is left for the owners. Together they tell you how much of the top line the business keeps. Healthy companies keep more than their competitors do. Sick ones leak it on the way down.

Three, cash. Put free cash flow next to net income. If the profit keeps showing up and the cash never does, the earnings are not real yet. That is how companies look healthy right up until they aren't.

Four, leverage. Net debt over EBITDA. Debt holders get paid first, so the higher that number, the more of the cash flow is already claimed and the less room this company has to survive a single bad year.

Five, liquidity. Cash plus the revolver against everything that comes due in the next twelve months. This is the one that actually kills the company. The other four are trends and this one is an event. A bill comes due, the cash is not there, and it is over for the business. The margins do not save you. The growth story does not save you. Nothing on the income statement saves you if you cannot pay your debt holders.

That is five steps in about sixty seconds, and it defends a verdict on any company anyone hands you.

How to get the reps

There is a real Super Day case built exactly this way. You get two consumer company income statements in percentage-of-revenue terms, five years each, and one question: which would you rather own. Read the case, then pull up two real consumer companies, line the filings up the same way, and run the checklist yourself. That is the rep that makes it stick. Where you land matters far less than whether you can get there cleanly, which is the thing being measured.

That checklist is basically what Bethany McLean would have run on Enron with nothing but public filings, and it is what any analyst runs on any public company. The 10-Ks are public. Then you carry the verdict into valuation, because what a good business is worth is a separate argument entirely.