Madrigal Pharmaceuticals, Inc.

• ✕ ProfitableReturn on assets above zero failed
• ✕ Cash from operationsOperating cash flow above zero failed
• ✓ Profitability improvedReturn on assets higher than a year before passed
• ✓ Profit backed by cashOperating cash flow above net income (low accruals) passed
• ✕ Less long-term debtLong-term debt as a share of assets fell failed
• ✕ More liquidCurrent ratio higher than a year before failed
• ✕ No new sharesShare count did not grow failed
• – Better gross marginGross margin higher than a year before — not reported no data
• ✓ Sells more per assetAsset turnover higher than a year before passed

Where it misleads: it measures change, not level. An excellent business that stood still for a year scores low; a poor one recovering from a disaster scores high.

• Working capital ÷ assets 0.74 × 6.56+4.87
• Retained earnings ÷ assets -1.66 × 3.26-5.41
• Operating income ÷ assets -0.24 × 6.72-1.60
• Equity ÷ liabilities 0.92 × 1.05+0.96

Where it misleads: buybacks. A company that returns so much cash that its equity turns small or negative sinks the last two ratios without being anywhere near bankruptcy. Banks and insurers do not fit the model at all.

• Receivables vs sales 0.47+0.43
• Gross margin slipping 1.00 (not reported, set to 1)+0.53
• Soft assets 1.43+0.58
• Sales growth 5.32+4.75
• Slower depreciation 0.67+0.08
• Overheads vs sales 0.35-0.06
• Profit not in cash -0.08-0.37
• Leverage rising 1.88-0.61

Where it misleads: fast growth and acquisitions. Sales growth carries a heavy weight, so a company growing 50% a year scores like a suspect without having done anything. It is a screen from a 1999 study, not an accusation.