Credit Ratings
Rating agencies such as Standards and Poor’s, and Moody’s study the companies and issue credit ratings to companies as well as specific debt issues. To arrive at these ratings, the rating agencies employ formulas that are based on financial numbers, ratios, and business characteristics. The items used in these formulas can be broadly classified into the following four categories:
- Scale and Diversification
- Operational Efficiency
- Margin Stability
- Leverage
While assigning credit rating to a company, the rating agency will look at these broad areas. For example, a company with larger scale of operations and diversification in terms of their products and geographical reach will have better credit quality. Similarly they will look for operational efficiency, profit margin stability, and leverage to assess the credit quality.