Moneycontrol
Last Updated : Nov 28, 2018 02:10 PM IST | Source: Moneycontrol.com

Five major risks that credit rating agencies evaluate about companies

Credit rating agencies such as CRISIL, ICRA, CARE usually assign ratings to financial instruments in the form of symbols such as AAA, AA+ and BB. What are the parameters? Read to know:

Moneycontrol News @moneycontrolcom
Many retail investors base their investment decision on the rating given to a particular financial product without understanding the parameters on which these ratings are given to them. A credit rating agency (CRAs) assigns ratings to several financial services companies' products. These agencies assess financial services companies by analysing risk parameters. Here are the risk measures that CRA takes into account while analysing a company’s profile: (Image: Pexels)
1/6

Many retail investors base their investment decision on the rating given to a particular financial product without understanding the parameters on which these ratings are given to them. A credit rating agency (CRAs) assigns ratings to several financial services companies' products. These agencies assess financial services companies by analysing risk parameters. Here are the risk measures that CRA takes into account while analysing a company’s profile: (Image: Pexels)

Financial Risk | The analysis of such risks assesses the sustainability and sufficiency of the company's cash flows with particular emphasis on its debt servicing ability. It includes an assessment of the business strengths of the company and how these translate into its current and future financial performance. (Image: Pexels)
2/6

Financial Risk | The analysis of such risks assesses the sustainability and sufficiency of the company's cash flows with particular emphasis on its debt servicing ability. It includes an assessment of the business strengths of the company and how these translate into its current and future financial performance. (Image: Pexels)

Business Risk | Its analysis takes into account the sustainability and stability of a company’s cash flows which plays a vital role for investors to analyse the companies strength mainly during cash crunch time. (Image: Pexels)
3/6

Business Risk | Its analysis takes into account the sustainability and stability of a company’s cash flows which plays a vital role for investors to analyse the companies strength mainly during cash crunch time. (Image: Pexels)

Management Risk | The analysis of these risks consists of the company’s management philosophies, strategies/policies, and risk appetite. The management’s experience and their track record are one of the things that are evaluated. (Image: Pexels)
4/6

Management Risk | The analysis of these risks consists of the company’s management philosophies, strategies/policies, and risk appetite. The management’s experience and their track record are one of the things that are evaluated. (Image: Pexels)

Project Risk | If you are willing to invest in a new project of any company, it is important to know the final output and several other beneficial aspects of that project. Generally, a company raises fund when they launch new projects. Thus, if a company is implementing a new project, the risks associated with that project are also factored in while assigning the overall rating. (Image: Pexels)
5/6

Project Risk | If you are willing to invest in a new project of any company, it is important to know the final output and several other beneficial aspects of that project. Generally, a company raises fund when they launch new projects. Thus, if a company is implementing a new project, the risks associated with that project are also factored in while assigning the overall rating. (Image: Pexels)

Default risk | They are important to understand because it directly affects the company’s profile. The chance that companies will be unable to make the required payments on their debt obligations is evaluated under this category. Mostly, lenders, financial institutions and investors are exposed to default risk in virtually all forms of credit extensions. Hence, one should make sure that they know about the company in detail, their debts, their future investment, backup plans and their overall strength in the present market while investing monies in their financial instruments for the long term. (Image: Pexels)
6/6

Default risk | They are important to understand because it directly affects the company’s profile. The chance that companies will be unable to make the required payments on their debt obligations is evaluated under this category. Mostly, lenders, financial institutions and investors are exposed to default risk in virtually all forms of credit extensions. Hence, one should make sure that they know about the company in detail, their debts, their future investment, backup plans and their overall strength in the present market while investing monies in their financial instruments for the long term. (Image: Pexels)

First Published on Nov 28, 2018 02:10 pm
Loading...
Sections
Follow us on
Available On
PCI DSS Compliant