The Ratings Analysis in Valutico offers a quantitative evaluation of a company's creditworthiness based on its projected financial performance. This tool automatically calculates the company’s credit rating, implied credit spread, and probability of default for each year in your forecast period. The analysis provides valuable insights into a company's financial health and its ability to meet future debt obligations.
How to Access the Ratings Analysis
You can find the Ratings Analysis in the Business Plan module within a Valuation.
Understanding the Ratings Analysis Table
The Ratings Analysis table presents a detailed, year-by-year breakdown of the company’s credit profile. Key components include:
EBIT (Earnings Before Interest and Taxes):
A measure of a company’s operating profitability, before accounting for interest and taxes.
Interest Expense:
The cost the company incurs to service its debt for a given year.
Interest Coverage Ratio:
Calculated as EBIT ÷ Interest Expense, this ratio reflects the company's ability to meet its interest obligations. A higher value indicates stronger debt-servicing capacity.
Rating:
A letter grade representing the company’s credit quality based on the Interest Coverage Ratio for each year.Example: AAA (highest rating, lowest risk) to D (lowest rating, highest risk).
Rating Numerical:
A numerical equivalent of the letter rating (e.g., AAA = 1, AA+ = 2). This can be used in quantitative models.
Implied Credit Spread:
The additional yield required by investors to hold the company’s debt compared to a risk-free asset. This value is derived directly from the assigned credit rating.
Implied Probability of Default:
An estimate of the likelihood that the company will default on its debt obligations in each forecast year. This probability is tied to both the assigned rating and the year.
Time Frame:
The analysis spans from the last actual fiscal year through the full forecast period, including the Terminal Year.
How the Ratings Analysis Works
Calculate the Interest Coverage Ratio:
EBIT and Interest Expense are retrieved from the Financial Projections tab in the Business Plan. The Interest Coverage Ratio is calculated for each year by dividing EBIT by Interest Expense.
Assign a Credit Rating:
The calculated ratio is compared to predefined thresholds in the Ratings reference table (found at the bottom of the Ratings Analysis page). Based on where the ratio falls, the appropriate rating is assigned.
Example: An Interest Coverage Ratio of 22.9x exceeds the 12.50x threshold, resulting in a AAA rating, a numerical score of 1, and a corresponding credit spread of 0.75% (as shown in the table).
Determine Concluded Rating and Credit Spread:
The tool averages the Rating Numerical scores across the entire period. Based on this average, the Concluded Rating and Concluded Credit Spread are derived.
Estimate Implied Probability of Default:
Using the Concluded Rating, the implied probability of default is assigned for each forecast year. The likelihood of default typically increases over longer time horizons.
Using the Credit Spread in Cost of Debt Calculations
The Concluded Credit Spread from the Ratings Analysis can be used as the "Spread over risk-free rate" in your Cost of Debt calculations. For further guidance, refer to the Cost of Capital section.
