How to Check If a Company Is Investment-Grade It is probably easier to decide where not to invest than where to invest. In many cases, the decision is made by examining a corporation's financial and balance statements and, of course, its rating. In theory, an investor can look into any public company's books. In practice this is close to impossible. The rating process is also not excessively transparent. What can a private investor do? Are there any mechanisms which would safeguard an investor from making an investment into a company that, on the surface looks good but in reality hides a nasty surprise. The answer is affirmative. Today it is possible to get a quick estimate of a company's resilience by analyzing its financials. Now resilience says nothing of how well the company's stock is doing, or how likely the company is to pay its obligations. What it does tell you is if the company is able to withstand shocks and extreme events (known as Black Swans). Since shocks and extreme events are becoming more and more common, this seems to be a good idea. How does it work? Simple: 1. Go to the website of a company you want to invest in. 2. Under "Investor Relations" you will find its quarterly financial statements. Download the last 12 quarters. 3. Arrange them in an array in MS-Excel as shown in this example. 4. Upload the MS-Excel file to our resilience rating portal. (www-rate-a-business.com) 5. Process the data and download your report. The point is now to see how the company in question is rated from a resilience point of view. We may distinguish five categories of business resilience. Each level is assigned a number of stars ranging from one to five – a five star business being best:
Business resilience is very low. The business structure is weak. It is unsustainable and very fragile. Exposure is very high and the business is inefficient and difficult to manage. It is impossible to make forecasts. The business is a candidate for default. Such a company is non investment grade. Rating: Business resilience is low. The business is difficult to manage and control. Exposure is high as well as inefficiency. The structure of the business is fragile hence vulnerable. It is difficult to make forecasts. Rating: Business resilience is medium. The structure of the business is fairly robust. Performance predictability is acceptable. Exposure is moderate. Rating: Business resilience is high. This indicates a robust business structure. Predictability is high, exposure is low. Business sustainability and efficiency are quite high. Rating:
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Business resilience is very high. This business structure is very strong. Exposure is very low. The business is manageable and it is possible to make credible forecasts. The business is potentially highly sustainable and efficient. Rating:
So, all you need to do is to stay away from one-star companies. Their financial statements may not genuinely reflect their current state-of-health but they are surely chaos-dominated.
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Copyright Š 2011 Ontonix