Corporate Ratings and there effects
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Transcript of Corporate Ratings and there effects
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8/10/2019 Corporate Ratings and there effects
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Corporate Rating Methodology
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Introduction
Capacity & Willingness to pay service financialobligations
Strong correlation between short-term & long-termratings
At least 3 years past data & future expectationsanalyzed
Peer comparison
Sensitivity analysis
Various risks taken into account Quantitative & qualitative analysis
Overlaps present
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Industry Risk
Analysis of industry fundamentals
Industry life cycle position
Competition (Local/ International) Capital or labor intensity
Cyclical or volatile nature
Barriers to entry
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Operating Environment
Social, Demographic, Regulatory &
Technological changes
Geographical diversification/ Capacity
utilization
Expansion/ Consolidation
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Management
Corporate strategy/ Direction
Risk tolerance (financial acquisitions/ internalexpansion)
Funding policies (mix of equity & debt)
Aggressive short-term or conservative long termpolicies in place
Ability & willingness of sponsors to provide financialsupport
Management quality & Track record Achievements of previously set targets & probability of
meeting future projections
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Corporate Governance
Effectiveness & independence of board/
conflicts of interest
Oversight on related party transactions
Monitoring of audit function
Reasonableness of executive/ director
remuneration Relative complexity of shareholding structure/
family ownerships
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Accounting
Rating does not include audit
Accounting policies review
Accuracy of financial data
Restatement to make data more comparable
Special emphasis on: Valuation principles
Consolidation principles
Inventory costing
Depreciation methods
Income recognition
Pension provisions
Treatment of goodwill, off-balance sheet items & amortization policies
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Cash Flows
Cash flows given more importance than equity based datadue to better reflection of current market prices
Cash flow measures of earnings, coverage & leverage
Significance of CFO rather than external financing
Availability of funds to pay back debt Other factors not directly affecting cash flows also
considered: Marking of assets to market
Impairment charges
Derivatives
Write down of inventory
Foreign currency movements
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Earnings
Earnings form basis of cash flows
Assessment of stability/ continuity of earnings
Non-operational one time inflows/ outflows Effect of non-cash provisions
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Capital Structure
Debt & equity mix based on industry
Companys reliance on external financing
Off-balance sheet debt (party owned companies &unconsolidated subsidiaries)
Receivable securitization if any Preferred stock issues/ conversion options
Adjustments for better comparison including: Asset values
Leased property
Contingencies
Treatment of goodwill
Provision of deferred taxes & off-balance sheet items
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Financial Flexibility
Latitude to meet debt service obligations &
manage stress
More conservative capitalization results in
better financial flexibility
Ability to redeploy assets & revise capex plans
Strength of banking relationships
Equity market access
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Project Risk Evaluation
Relative size of project undertaken in
comparison to company size
Projects business risk
Funding options available
Probability & contingency plans for:
Cost & time overruns Technology risk
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Financial Ratios
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Earning/ Profitability Ratios
Turnover growth
Gross margin
Operating margin
Pre-tax profit margin
Net profit margin Effective tax rate
Average interest rate
Pre-tax return on equity
Return on equity
Asset turnover Net profit margin
Financial leverage
Return on assets
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Coverage Ratios
Short term debt payback (years)
Total debt payback (years)
Net debt payback (years) Net debt / EBITDA
EBITDA net interest cover (times)
Net interest cover (times)
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Liquidity Ratios
Current ratio
Quick ratio
Average inventory days (days) Average trade debtors (days)
Gross cash cycle (days)
Average trade creditors (days) Net cash cycle (days)
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Financial Structure Ratios
Current debt/ total debt
Total debt/ equity
Net debt/ equity
Equity/ assets
Total debt/ Adjusted equity (net of rev.surplus)
Total liabilities/ equity
Total debt/ (total debt + equity)