Red flag: revenue declining

Interpretation

Triggered when the latest fiscal year's revenue fell more than 3% below the prior year's.

Formula

Trigger: latest revenue < 97% of prior-year revenue

Why it matters

Shrinking revenue is the most fundamental warning a business can give: fewer customers, lower prices, or lost share. Costs rarely shrink as fast as sales, so revenue declines compress margins with a lag, and every downstream number — earnings, FCF, the quality score's growth points — deteriorates from here first. The 3% threshold filters out rounding-level noise while catching genuine contraction.

What good looks like

When triggered, establish the cause before anything else: a divested segment or currency swing is mechanical; a cyclical downturn is survivable if the balance sheet is; loss of a major customer or secular decline in the product is the serious case. One down year after a decade of growth is very different from the third consecutive decline.

Caveats

The check compares only two fiscal years, so it misses slow multi-year erosion under 3% a year and can trigger on a one-off (a 53-week prior year, a large divestiture, currency at a multinational). Companies exiting low-quality revenue on purpose — shrinking to improve margins — trigger the flag while doing the right thing. It is a question, not a verdict.