A credit rating estimates the credit worthiness of an individual, corporation, or even a country. It is an evaluation made by credit bureaus of a borrower’s overall credit history.[1] A credit rating is also known as an evaluation of a potential borrower's ability to repay debt, prepared by a credit bureau at the request of the lender (Black's Law Dictionary). Credit ratings are calculated from financial history and current assets and liabilities. Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan. However, in recent years, credit ratings have also been used to adjust insurance premiums, determine employment eligibility, and establish the amount of a utility or leasing deposit.
A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates, or the refusal of a loan by the creditor.
Key factors considered for rating are:
- Business Analysis – Industry risk, market position and operating efficiency of the company, legal position.
- Financial Analysis – Accounting quality, earnings position, adequacy of cash flows, and financial flexibility.
- Management Evaluation – Goals, philosophy, strategies, ability to overcome adverse situations, managerial talents and succession plans, commitment, consistency and credibility.
- Regulatory and Competitive Environment -
- Fundamental Analysis – Liquidity management, assets quality, profitability and financial position, interest and tax sensitivity.
Factors listed above at serial numbers 1, 2, and 3 are evaluated for manufacturing companies, while 4 and 5 factors are used to evaluate finance companies apart from the 1, 2 and 3 factors
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