CRISIL Ratings Research Approach To Financial Ratios 2013
CRISIL’s Approach to Financial Ratios
Executive Summary
The analysis of a company’s financial ratios is core to CRISIL’s rating process as these ratios help understand a company’s overall financial risk profile. CRISIL considers eight crucial financial parameters while evaluating a company’s credit quality: capital structure, interest coverage ratio, debt service coverage, net worth, profitability, return on capital employed, net cash accruals to total debt ratio, and current ratio. CRISIL considers present as well as future (projected) financial risk profile while assessing a company’s credit quality. These parameters give an insight to the company’s financial health and are factored into the final rating. However, the final rating assessment entails the interplay of various other factors such as financial flexibility, business, project, and management risks.
Scope and Objective
This article focuses on the key ratios that CRISIL uses in its rating process for manufacturing companies.
These same ratios are also used, with minor variations if necessary, in analysing trading companies, logistics providers, construction companies, and a majority of service sector companies. The article aims to explain CRISIL’s approach to financial ratios and the formulae employed in computing them. This is beneficial to users of CRISIL Ratings, including investors in corporate debt.
Credit rating is not determined solely on the basis of financial ratios. Among other factors that play a key role in determining credit ratings are industry risk evaluations, operating efficiency, market position, management risk evaluation, financial flexibility, project risks, and support from a strong parent. The financial ratios indicated here are used as inputs in rating financial risk, which, in turn is factored into the overall assessment of a company’s credit quality.
CRISIL’s Approach to Financial Ratios
Chart 1: Use of Financial Risk Analysis in Rating Decisions
Accounting
Quality
Business
Executive Summary
The analysis of a company’s financial ratios is core to CRISIL’s rating process as these ratios help understand a company’s overall financial risk profile. CRISIL considers eight crucial financial parameters while evaluating a company’s credit quality: capital structure, interest coverage ratio, debt service coverage, net worth, profitability, return on capital employed, net cash accruals to total debt ratio, and current ratio. CRISIL considers present as well as future (projected) financial risk profile while assessing a company’s credit quality. These parameters give an insight to the company’s financial health and are factored into the final rating. However, the final rating assessment entails the interplay of various other factors such as financial flexibility, business, project, and management risks.
Scope and Objective
This article focuses on the key ratios that CRISIL uses in its rating process for manufacturing companies.
These same ratios are also used, with minor variations if necessary, in analysing trading companies, logistics providers, construction companies, and a majority of service sector companies. The article aims to explain CRISIL’s approach to financial ratios and the formulae employed in computing them. This is beneficial to users of CRISIL Ratings, including investors in corporate debt.
Credit rating is not determined solely on the basis of financial ratios. Among other factors that play a key role in determining credit ratings are industry risk evaluations, operating efficiency, market position, management risk evaluation, financial flexibility, project risks, and support from a strong parent. The financial ratios indicated here are used as inputs in rating financial risk, which, in turn is factored into the overall assessment of a company’s credit quality.
CRISIL’s Approach to Financial Ratios
Chart 1: Use of Financial Risk Analysis in Rating Decisions
Accounting
Quality
Business