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WHAT IS A CREDIT RATING, HOW IS IT CALCULATED AND WHAT DOES IT TELL US?

Company credit rating and credit rating calculation

Are you interested in a credible credit rating of a company or the current credit ratings of business partners, based on verified business information?
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What is a company credit rating?

From the user’s perspective, a company’s credit rating is primarily a measure by which they assess the financial reliability of their business partners or their creditworthiness. Based on it, they can assess whether a business partner is good or bad, whether they will receive payment or not, and whether they will operate successfully in the future. Equally important for the user is their own credit rating. A good company credit rating outwardly expresses a kind of certificate that it is a financially reliable economic entity.

In addition to everything already mentioned, it is worth noting that a company’s credit rating is also a key component of a document called a credit report. The latter includes all relevant business information about the examined company or entity.

Reduce the risk of your own business and check the liquidity of potential and existing business partners.

Why is the calculation of the selected subject's credit rating important?

Uncertain economic conditions should consequently instigate the need for careful verification of the financial reliability of both existing and potential business partners.

The calculation of the credit rating is crucial for presenting the credit rating. Many companies nowadays leave nothing to chance and regularly check credit ratings or the creditworthiness of business partners. They are well aware that the calculation of the credit rating or the credit rating of the company is the first and one of the most important pieces of information that needs to be checked with every entry into a new business deal. Regardless of whether it concerns existing or potential business partners.

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How are company credit ratings calculated and what do they tell us?

Each credit rating agency has its own procedures for determining credit ratings. The credit rating of a company is expressed in various ways, in the form of letters and/or numbers, and in combination with symbols such as +/-. According to the methodology of the company Prva bonitetna agencija, d.o.o., used in the online application EBONITETE.SI, the credit rating of a company is expressed uniformly, without any combinations of characters, with numbers from 1 to 10. This standardized way of presenting credit ratings has an advantage for the user, as it easily indicates the financial position of the business partner and the level of default risk when dealing with them.

The company Prva bonitetna agencija, d.o.o., determines the credit rating as a synthesis of elements combined in two assessments, namely the “static” and “dynamic” assessments.

The “static” assessment is determined based on selected financial indicators, whose source is the balance sheet and income statement of the entity, with the relevant data obtained from the official register of annual reports. The result of calculating selected indicators places the entity in a certain class. The other part of the credit rating, the so-called “dynamic” assessment, is based on dynamic (rapidly changing) categories that, with ensured timeliness, serve as warning signals enabling the identification of potential risks long before these negative trends are reflected in the balance sheet and income statement of the entity. Elements for determining the “dynamic” assessment include various parameters such as data on account blockades, tax non-payment, number and value of legal disputes, etc.

The credit rating of a company according to the methodology of the company Prva bonitetna agencija, d.o.o., is provided in a range from “1” (worst credit rating) to “10” (best credit rating). It informs the user about the level of default risk when dealing with the entity for which the credit rating is determined. A credit rating of “10” indicates an extremely low risk of default when dealing with the entity, while a credit rating of “1” indicates a very high risk of default.

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What are the parameters for determining the financial (static) assessment?

There are several parameters for determining the financial (static) assessment. The emphasis is certainly on five selected financial indicators, which form the basis for calculating the financial, i.e., static assessment.

The basis for calculating the financial (static) assessment consists of the following indicators:

Debt Ratio  
[the lower the value, the better]

This indicator tells us the extent to which a company’s assets are financed by its debts. The indicator shows the company’s dependence on external sources of financing.

Current Ratio  
[the higher the value, the better]

This indicator shows the relationship between current assets and current liabilities and indicates the extent to which current assets cover current liabilities, or shows the company’s ability to repay obligations due within one year.

Credit Exposure  
[the lower the value, the better]

This indicator shows the relationship between short-term business receivables and business revenues on the last day of the business year and tells us the extent to which business revenues are tied up in receivables. Higher values of the indicator mean a higher proportion of open receivables relative to turnover, which can lead to liquidity problems if debtors delay payment of receivables. A simple and quick solution to improve this indicator and overall liquidity of the company is to sell receivables or buy receivables.

Net Return on Assets  
[the higher the value, the better]

This indicator shows the relationship between the operating result achieved and the average invested assets and indicates how much of the operating result is generated by the invested assets. Higher values of the indicator mean higher business performance.

Asset Turnover Ratio   
[the higher the value, the better]

This indicator shows the relationship between revenues achieved and average invested assets and indicates the dynamics of asset turnover through revenues. A higher value of the indicator means that the entity is more successful, as assets require less time to convert into liquid form.

What are the parameters for determining the non-financial (dynamic) assessment?

Parameters for determining the non-financial (dynamic) assessment can change on a monthly or even daily basis.

The most important parameters for calculating the non-financial (dynamic) assessment are:

Account Blockades (length and frequency of account blockades)

Ownership of transaction account

Decision on Deletion (occurrence of decision on deletion)

Involvement of the entity in legal disputes (participation in a dispute either as a plaintiff or defendant and the size of the amounts claimed)

Tax obligor or non-submitter of reports for wages (frequency of tax obligor or non-submitter of reports for wages)

Payment habits (delays in payment of obligations)

Missing trader status of the entity, and

Filing of claims in insolvency proceedings (size of claims)

what are credit ratings used for?

Credit ratings serve to enable users of the EBONITETE.SI application to assess the level of business risk with the selected entity.

The data used to calculate credit ratings of entities are usually updated daily, as the timeliness of credit ratings is one of the most important tasks of any credit rating agency.

Credit ratings thus serve users who are interested in the likelihood of whether their existing or potential business partner will fulfill their financial obligations.

The calculation of credit ratings is certainly important in meeting the requirements for the Certificate of Financial Reliability. The Certificate of Financial Reliability, issued by Prva bonitetna agencija d.o.o., is the first and only (credit) certificate in the Slovenian business space, the conditions for obtaining which are clearly defined and publicly disclosed. One of the conditions is also that the entity, at the time of issuing the certificate, according to the criteria for determining the credit rating in the issuer’s application for the Certificate – EBONITETE.SI, has a credit rating of 7, 8, 9, or 10.

Credit ratings in public tenders

It is worth adding to all the above that a credit rating serves not only as a kind of certificate that the business partner is a financially reliable economic entity but is also often a requirement for applying in public tenders of Slovenian “issuers”, with many of them, such as Slovenski regionalni razvojni sklad, the Ministry of Economic Development and Technology, and occasionally also the Eko sklad, considering credit ratings determined according to the methodology of the company Prva bonitetna agencija, d.o.o., in their tenders.

If you want to reduce the risk of your business operations and are interested in reliable credit ratings of companies or credible credit ratings of business partners, then you are in the right place.

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