The FHR® is based on a detailed analysis of a company’s balance sheet, income statement, and cash flow statement. For the latter two, our model requires a trailing twelve-month perspective. This eliminates the need to adjust for seasonal variations and provides a comprehensive view of financial health that is generally more accurate and predictive.
It is difficult to overstate the global economic impact of COVID-19. Activity and output have declined to varying degrees in virtually every region and sector and this will necessarily impact corporate financial health as businesses cope with steep drops in customer demand. As always, those businesses that entered the crisis with stronger financial health are more likely to emerge successfully.
As shown in Table 1, with many companies having already released Q1 financial statements, a modest downward trend is apparent. The average company has seen its FHR fall by 1 point and its CHS fall by 2 points since YE 2019. The change is dampened because, while material economic disruption began occurring in February and March 2020, the bulk of the trailing twelve-month period is unaffected. That said, we observe more significant changes for certain sectors. Energy and Transportation companies show more serious downturns, indicating rapid financial deterioration and elevated risk.
Table 1: Average quarterly FHR and CHS change between 2019 YE and 2020 Q1 for Public Companies
As we continue progressing through 2020, we will observe an increasing impact of COVID-19 related economic pressures on the overall financial statements, and thus the ratings. Monitoring critical business partners is more important than ever.
To review our analysis of potential scenarios, we encourage you to review our stress test.