the technology behind s peek the more rating
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The technology behind s-peek: the MORE Rating and the MORE Credit LimitTRANSCRIPT
The technology behind s-peek: the MORE Rating and MORE Credit Limit
MORE Credit Rating: definition
MORE Rating Class Rating Macro class Assessment
AAA
Healthy companies
The company's capacity to meet its financial commitments is extremely strong. The company shows an excellent economic and financial flow and fund equilibrium.
AA The company has very strong creditworthiness. It also has a good capital structure and economic and financial equilibrium. Difference from 'AAA' is slight.
A 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.
BBB Balanced companies
Capital structure and economic equilibrium are considered adequate. The company's capacity to meet its financial commitments could be affected by serious unfavourable events.
BB 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.
B Vulnerable companies
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.
CCC 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.
CC
Risky companies
The company shows signals of high vulnerability. In the event of adverse market and economic conditions, the company's strong disequilibrium could increase.
C The company shows considerable danger signs. The company's capacity to meet its financial commitments is very low.
D The company no longer has the capacity to meet its financial commitments.
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 Credit Rating: fundamental idea
Rating evaluationSolvency
Liquidity
Profitability
Interest Coverage
Efficiency
MORE looks at the fundamentals and at them equilibrium
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 Examples
Weights importanc
e
Solvency ratios
Solvency ratios help investors assess a company’s ability to meet its long-term obligations. They also explain how the company has been financed (debt or equity).
Debt to Equity
1st Debt to Assets
…
Liquidity ratios
These ratios are used to determine whether a company is able to pay off its short-terms debts obligations
Quick ratio
1th Current ratio
…
Profitability ratios
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
Return on Equity
2nd Return on Investment
…
Interest coverage ratios
These ratios are used to determine how easily a company can pay interest on outstanding debt
EBIT on Interest Paid
3th Profits on Interest Paid
…
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
Comments 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
MCDM
Weighted Sum Score ABC = 1,0+0,4 = 1,4 Score XYZ = 0,5+0,9 = 1,4 Score UVW = 0,7+0,7 = 1,4 It is impossible to decide! The three companies are
equivalent!
MORE MORE Goodness of ABC = 0,5884 MORE Goodness of XYZ = 0,6260 MORE Goodness of UVW = 0,7000
There is a difference among the
companies. It is possible to assert that
UVW>XYZ>ABC
Company Ra*o x Ra*o y
ABC 1,0 0,4
XYZ 0,5 0,9
UVW 0,7 0,7
MORE Credit Rating: final rating
MCDM
Company Financial Ra*o 1 Financial Ra*o 2
ABC GOOD POOR
XYZ POOR GOOD
UVW GOOD FINANCIAL EQUILIBIUM
For a company, the better the equilibrium is, the better final rating will be.
Company UVW
Financial ratio 1
Fina
ncia
l rat
io 2
Company XYZ
Company ABC
Ideal Best Company
AAA
AAA
Ideal Negative Company
D
D
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
• 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.
Rating
• 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.
Years
• It represents how many different companies are providing goods and services, using the 80% of the total purchasing value.
Number of majors suppliers
• 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.
Cash Cycle
• 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.
Total costs of suppliers
MORE Credit Limit: suppliers
MORE Credit Limit studies the distribution of the suppliers’ costs, taking in account the total costs of major suppliers.
MODEFINANCE
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