RapidRatings’ Financial Health Rating (FHR®) is a purely quantitative measure of risk that estimates the financial strength and weakness of firms. This is achieved by combining the Core Health Score (CHS) models that test 62 ratios focused on benchmarking operational efficiency against industry peers, with 11 additional resilience ratios that are specifically focused on short-term (within the next year) default estimation.
This two-tiered approach, of first estimating Core Health and then dynamically overlaying resiliency, sharpens the default prediction accuracy and improves the discrimination between high-risk survivors and high-risk defaulters in the next 12 months.
Many of the tested ratios, particularly ratios which measure rates of return, capital structure efficiency, liquidity and repayment capacity, are based on a comparison of financial line items from a company’s income statement or cashflow statement to its balance sheet. For this reason, our model requires a trailing twelve-month perspective for both the income statement and cash flow statement. A methodology based on trailing twelve-months also eliminates the need to adjust for seasonal variations and generally leads to fewer false positives and less ratings volatility, in turn alleviating unnecessary due diligence on your part.
The FHR will reflect COVID-19 impacts once these are presented in the financial statements, and this impact may initially be dampened by preceding financial quarters. Nevertheless, we continue to advise relying on the FHR as computed. Businesses with poor financial health are more vulnerable to the impacts of these shocks. Conversely, businesses with strong financial health are much better positioned to withstand challenging market conditions and rebound afterward.
The FHR models are calibrated with data spanning at least six business cycles and includes comparison to defaulters and survivors from previous crises, providing a comprehensive view of potential performance in various macroeconomic conditions. It has a remained an accurate leading indicator of company failure throughout.