The technology behind speek: the MORE Rating and MORE Credit Limit
MORE Credit Rating: definition What is credit rating? Credit rating is an opinion of the economic and financial quality of a company based on relevant risk factors. A different probability of default (within one year, two years and three years) is associated with each credit rating class (indicated by symbols: traditional AAA to D). MORE Rating Class
Rating Macro class
AAA AA
Healthy companies
A BBB BB
Balanced companies
B CCC
Vulnerable companies
CC C D
Risky companies
Assessment The company's capacity to meet its financial commitments is extremely strong. The company shows an excellent economic and financial flow and fund equilibrium. The company has very strong creditworthiness. It also has a good capital structure and economic and financial equilibrium. Difference from 'AAA' is slight. The company has a high solvency, The company is however more susceptible to the adverse effects of changes in circumstances and economic conditions than companies in higher rated categories. Capital structure and economic equilibrium are considered adequate. The company's capacity to meet its financial commitments could be affected by serious unfavourable events. A company rated 'BB' is more vulnerable than companies rated 'BBB'. The company faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions. The company presents vulnerable financial signals. Adverse business, financial or economic conditions will be likely to impair the company's capacity to meet its financial commitments. A company rated 'CCC' has a dangerous disequilibrium in its capital structure and financial fundamentals. Adverse market events or inadequate management are highly likely to affect the company's solvency. The company shows signals of high vulnerability. In the event of adverse market and economic conditions, the company's strong disequilibrium could increase. The company shows considerable danger signs. The company's capacity to meet its financial commitments is very low. The company no longer has the capacity to meet its financial commitments.
MORE Credit Rating: fundamental idea
MORE looks at the fundamentals and at them equilibrium
Profitability Interest  Coverage
Liquidity
Solvency
Rating  evaluation
Efficiency
MORE Credit Rating: evaluation steps
Ratios definition and choice From quantitative definition to qualitative definition Financial and economical equilibrium
RATING EVALUATION
MORE Credit Rating: ratios Category
Description
Weights Examples importanc e Comments
Solvency ratios
Liquidity ratios
Profitability ratios
Solvency ratios help investors assess a company’s ability to meet its longterm obligations. They also explain how the company has been financed (debt or equity).
These ratios are used to determine whether a company is able to pay off its short-terms debts obligations
The profitability of a company depends not only on the margins generated, but also on the assets that must be employed to generate those profits
Debt to Equity Debt to Assets
1
st
… Quick ratio Current ratio … Return on Equity Return on Investment
1th 2nd
…
Interest coverage ratios
These ratios are used to determine how easily a company can pay interest on outstanding debt
EBIT on Interest Paid Profits on Interest Paid
3th
…
Constraints on efficiency
modeFinance set many tests to check if the company is able to generate adequate margins from financial and operating management
Financial P/L, P/ L before or after tax, EBIT, etc.
4th
Using the statistical models and the finance theory, MORE weights in different way the importance of the financial ratios. MORE underlines the financial and economical equilibrium of the companies, overall looking at capital structure, earnings and financing.
MORE Credit Rating: qualitative approach Thanks to all the information in Bureau van Dijk products (80 Million companies in more than 200 countries), we can understand the economical behavior of every ratio, sector and country.
MORE Credit Rating: equilibrium
Suppose we should rate three firms; suppose that each firm could be characterized by two ratio’s values (for example: ROI and Leverage) in a range [0 - 1] (where 0 is the worst and 1 is the best value)
Company
Ratio x
Ratio y
ABC
1,0
0,4
XYZ
0,5
0,9
UVW
0,7
0,7
Which company is better than the others?
MORE Credit Rating: equilibrium Company
Ra*o x
Ra*o y
ABC
1,0
0,4
XYZ
0,5
0,9
UVW
0,7
0,7
Weighted Sum
MCDM
MORE
Score ABC = 1,0+0,4 = 1,4 Score XYZ = 0,5+0,9 = 1,4 Score UVW = 0,7+0,7 = 1,4
MORE Goodness of ABC = 0,5884 MORE Goodness of XYZ = 0,6260 MORE Goodness of UVW = 0,7000
It is impossible to decide! The three companies are equivalent!
There is a difference among the companies. It is possible to assert that UVW>XYZ>ABC
MORE Credit Rating: final rating Financial ratio 2
MCDM
AAA
Ideal Best Company
Company XYZ Company UVW
Company
Financial Ra*o 1
Financial Ra*o 2
ABC
GOOD
POOR
XYZ
POOR
GOOD
Company ABC
UVW
D Ideal Negative Company D
GOOD FINANCIAL EQUILIBIUM
AAA Financial ratio 1
For a company, the better the equilibrium is, the better final rating will be.
MORE Credit Rating: validation VALIDATION
UK, Germany, Finland, Italy: almost same results (Gini Index > 70) The model is able to recognize the bankrupt companies with the same accuracy in different countries: comparable credit scoring evaluation.
MORE Credit Rating: validation with the s-peek macro Classes VALIDATION
MORE Credit Limit: definition MORE Credit Limit is the estimation of the amount of maximum credit that is possible to assign on a commercial relationship with the analyzed company with an outlook of one year. modeFinance used the following values associated with the company analyzed while computing the credit limit: • Size; • Years in Business; • Average number of suppliers; • Liquidity of the company and the comparison with its sector; • The funds dedicated to be paid to suppliers; • The likelihood that a company may pay its debts in the next 12 months (MORE Ratings).
MORE Credit Limit: variables Rating
• Credit rating is an opinion that is based on financial trustworthiness of a company: the better the rating, the higher the credit limit. It also represents the capability of the company to access to external funding.
Years
• It is well known that a startup company is much riskier than a company that has been operating in the market for a long time.
Number of majors suppliers
• It represents how many different companies are providing goods and services, using the 80% of the total purchasing value.
Cash Cycle
• It is a measure of the average number of days that a company takes to collect revenue after a sale has been made. The lower DSO value, the higher the credit limit. It is important to compare those value with the average of the sector.
Total costs of suppliers
• This value represents the total costs of suppliers for a company in one year. The total costs are integrated by the propensity of each sector’s average amount of spending for suppliers. If the P&L account is missing, modeFinance assumes bank approach: tangible net worth of the company.
MORE Credit Limit: suppliers
MORE Credit Limit studies the distribution of the suppliers’ costs, taking in account the total costs of major suppliers.
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