Credit risk assessment methodology
In the process of assigning credit ratings and their future updates, the analysis of the financial and economic situation of the rated entity has a very wide scope, because the credit risk assessment in this case relates to a long-term perspective (up to three years), and in addition it is essential to evaluate, as precisely as possible, the level of risk in order to determine the proper rating level. Upon the assessment of the financial reliability of the enterprise, EuroRating applies quantitative and qualitative analysis methods.
A quantitative assessment includes mainly an analysis of financial statements of the rated entity (if possible, for the last ten years, taking also into account the newest quarterly reports and forecasts of future results), performed, amongst others, with the application of scoring models of credit risk assessment adjusted to the specificity of industry sectors. A significant element of a quantitative analysis is an assessment of the stability of financial indicators, as well as the dynamics and direction of changes in the basic values defining the company's condition. The agency places significant emphasis on the analysis of cash flows, which are particularly important from the point of view of the company's solvency.
The assessment of the company's financial situation also includes a comparable analysis, consisting in an evaluation of both individual parameters and the general risk profile in relation to other entities, which constitute a reference group.
A qualitative analysis includes an assessment of several factors, which are not easily quantifiable and require an expert assessment. These may include, amongst others: industry and economic environment risk, sensitivity to changes in currency exchange rates and/or prices of commodities, dependence on suppliers or clients, the company's market position, the business model, the quality and innovation of products, experience and qualifications of the management, applied accounting principles, the quality and the market value of assets, as well as the ownership structure and the probability of support from the shareholders if needed.
A combination of results of both analysis areas allows performing the final assessment of the economic and financial situation of the rated entity and its ability to pay its financial liabilities in the long-term perspective and assigning a reliable credit rating.