Company Rating

Company rating is a term heard more and more since the recent credit crunch. Rating a business or at least the assets of a business has become a hot topic. It is clear for example that in the financial markets the reputation of the so-called credit rating agencies (Standard and Poor’s, Moodys etc.) has taken a significant hit.  The irony being that if they themselves were given a company rating it would have shown a marked decline in 2008!

Company ratings are also important in the real economy. With a projected increase in the number of businesses going bankrupt in 2008 in the UK, it has never been more important for business people here to get a company rating on a supplier or customer that may be an ongoing business partner. With a predicted 2008 first quarter increase in company insolvencies of round 8.5% over the same period last year, the drop of over 5% in the whole of 2007 would be overshadowed.

Unfortunately many established companies are feeling the pinch as well, and care should be taken even with existing long standing business dealings. Company rating is now an everyday term in the business world and when used properly company ratings can be of enormous benefit to any business or individual.

The Bank of England undertook the UK’s most comprehensive econometric study of Corporate Failure. The results were published in Working Paper 210 in 2003. This paper examined the determinants of failure among individual UK public and private companies, over the period from 1991 to 2001.

Using information on

• Profitability
• interest cover
• capital gearing
• liquidity
• company size
• industry
• whether a firm is a subsidiary
• overall economic conditions

the Bank concluded that it is possible to construct estimates of the probability of failure for individual companies. These statistics are then formulated into a company rating by the various credit rating companies.  To see more on this see further information on the company credit score – checkSCORE.

Realisation of a problem after the event is a much easier task than discovering this beforehand. Regular checking of company ratings should help flag up many impending problems and could also stop the knock-on effect of failing businesses.

At checkSURE the company rating is only seen as a guide and Users should also bear in mind:

• Delays in payment from normally prompt paying customers. This may mean that they are not being paid themselves and causing the knock-on effect mentioned above, or it could mean that the business in question is struggling.
• Late delivery of purchased goods. This can be similar to the above with the chain being broken earlier but it can also mean that they cannot purchase the raw materials needed to manufacture.

In short, a company rating is a useful tool when used in conjunction with other elements to assess the risk of doing business but should not be relied on entirely.  It is amazing that checkSURE Users have known this for some time yet the investment banks and other supposed ‘sophisticates’ in the money markets are only now realising that over reliance on company ratings can lead to exposure to serious levels of risk.  Hail, the company rating!