28 Feb 2026
Shrinking fast, yet nowhere near distress
Revenue falling at 16.5% a year. Altman Z-score at 33.9. Shrinking fast and nowhere near distress. That's the worst place to be. I worked through why in this piece.
Strategy
There's a zone in corporate life that doesn't get discussed enough. Revenue falling, earnings compressed, assets shrinking, but the balance sheet is clean, debt is negligible, and cash is adequate.
This company sits squarely in that zone.
Revenue CAGR of negative 16.5% over two years. Total assets down 41% from $383 million to $224 million. Equity down 35%. But the current ratio is 1.3. Debt-to-equity is 0.02. Interest coverage is 21.8 times. Altman Z-score is 33.9, so far from distress it almost doesn't register on the scale.
The problem is that distress forces action. When a company can't make payroll or is about to breach covenants, the urgency is obvious. Decisions get made and things change.
This middle ground (declining but comfortable) doesn't force anything. A clean balance sheet and adequate cash reserves and the conclusion is that there's no crisis. Quarterly results show margin improvement because costs are falling alongside revenue. The dividend keeps flowing. Nothing looks urgent.
Meanwhile, the revenue base is contracting at $21 million per year. The operating leverage in this business is 2.65x, which means every dollar of revenue decline hits earnings by $2.65. That's the mechanical reality of a fixed-cost services business with 84.5% of revenue consumed by operating expenses.
Here's where the projections go: at the current trajectory, revenue hits $98 million within three years. That's a 42% decline from today. At current margins, that translates to operating profit of around $3.5 million on a business still carrying $142 million in equity. Return on equity drops below 2.5%.
At that point, the company still isn't distressed. Cash reserves could sustain it for years. But you've effectively turned a $382 million enterprise into a subscale business with no competitive momentum and no capital to rebuild.
The balance sheet currently provides the capacity to invest aggressively and reverse the revenue decline. But every year that doesn't happen burns through more of that optionality.
A fortress balance sheet is only useful if you deploy it. Otherwise, it's just a comfortable place to sit while the business gets smaller.