Analysis of reporting documents
IN 1934 year due to the incomparability of financial statements and for a number of other reasons, the US Congress created the Securities and Exchange Commission (Securities and Exchange Commission – SEC). The Commission was empowered to regulate the activities of all companies, issuing securities to the market.
One of the main goals of the SEC is to ensure the accuracy of financial information in the reports published by the firm.. To achieve this goal, Generally Accepted Accounting Principles have been developed. (Generally Accepted Accounting Principles – GAAP).
One of the main goals of GAAP is to provide such a financial reporting structure., which allows you to compare the documentation of different companies.
Other GAAP requirements include regulations, defining:
- Accounting Periods (Frequency of reporting)
- Matching (Completeness of coverage)
- Conservatism (Conservatism)
- Understandability (Clarity)
- Relevance (Materiality)
- Reliability (Reliability)
- Consistency (Continuity)
P.S. This list of principles does not include all GAAP requirements., but only those, That, first of all, relate to external reporting.
Three main documents serve as the object of fundamental analysis of the company: Balance (Balance Sheet), Profit statement (Income Statement), Capital flow statement (Cash Flow Statement). These documents are part of the quarterly (Form 10Q) and annual (Form 10K) reports, which the company regularly provides to the Securities and Exchange Commission (SEC).
- Balance Sheet
The main financial document of the company is the Balance Sheet (Balance Sheet), or Statement of financial position (Statement of Financial Position). Balance (Balance Sheet) - financial report, showing means, liabilities and equity of a company at a point in time.
Balance sheet items are usually arranged in order of decreasing liquidity (Liquidity). (liquidity is a measure of, how simple are the assets, presented in balance sheet items, can be converted into cash, cash).
If the financial position of the company is presented in the report for more than one year, the report is called Comparative Balance Sheet (Comparative Balance Sheet).
Term "Current" assets means assets, with maturities less than one year or reporting period, and "long-term" assets - have maturities of more than one year or reporting period.
The balance has three parts: Funds (Assets), Commitments (Liabilities) and Capital (Stockholders’ Equity).
Funds (Assets) - resources, necessary for the functioning of the company, such as money, securities of other companies, premises and production facilities, patents, etc.. Current working capital (Current Assets) Are assets, to be converted into cash, sold and used within one year. fixed assets (Fixed assets) Are assets, which are supposed to be used longer, than within one year, e.g. buildings, vehicles, equipment, long-term investments, etc..
Commitments (Liabilities) - these are external sources of the company's resources - loans, bank loans, etc.. Liabilities include short-term debt (Short-term Debt), creditors' accounts (Accounts Payable), that is, the debts of the enterprise to its suppliers, supply arrears to distributors (Deferred income on shipments to distributors), indebtedness in payment of compensations and benefits (Accrued compensation and benefits), advertising debt (Accrued advertising) and other accumulated debts (Other accrued liabilities).
Capital (Stockholders’ Equity) - funds, received from investors through the sale of securities and funds, the rest as part of the profit.
As an example, consider the balance sheet of the Coca-Cola company (Coca Cola) behind 2007 year.
All numbers in the report are in thousands (All numbers in thousands).
| Funds (Assets) | |
| Current working capital (Current Assets) | |
| Cash and cash equivalents (Cash And Cash Equivalents) | 4,093,000 |
| Short-term investments (Short Term Investments) | 215,000 |
| Debtor accounts (Net Receivables) | 3,317,000 |
| Inventories (Inventory) | 2,220,000 |
| Other current working capital (Other Current Assets) | 2,260,000 |
| Total current working capital (Total Current Assets) | 12,105,000 |
| Long term investment (Long Term Investments) | 7,777,000 |
| Property, production facilities and equipment (Property Plant and Equipment) | 8,493,000 |
| Business reputation (Goodwill) | 4,256,000 |
| Intangible assets (Intangible Assets) | 7,963,000 |
| Accumulated depreciation (Accumulated Amortization) | – |
| Other assets (Other Assets) | 2,675,000 |
| Total Assets | 43,269,000 |
| Liabilities | |
| Short-term liabilities (Current Liabilities) | |
| Accounts payable (Accounts Payable) | 7,173,000 |
| Loans and loans, which are due in the current year (Short/Current Long Term Debt) | 6,052,000 |
| Other current liabilities (Other Current Liabilities) | – |
| Total short-term liabilities (Total Current Liabilities) | 13,225,000 |
| long term duties (Long Term Debt) | 3,277,000 |
| Other liabilities (Other Liabilities) | 3,133,000 |
| Deferred long-term liabilities expense (Deferred Long Term Liability Charges) | 1,890,000 |
| Total liabilities (Total Liabilities) | 21,525,000 |
| Capital (Stockholders’ Equity) | |
| Preferred shares (Preferred Stock) | – |
| Ordinary shares (Common Stock) | 880,000 |
| Undestributed profits (Retained Earnings) | 36,235,000 |
| Profit, received from the turnover of fixed assets (Capital Surplus) | 7,378,000 |
| Other capital (Other Stockholder Equity) | 626,000 |
| Total capital (Total Stockholder Equity) | 21,744,000 |
| Net tangible assets (Net Tangible Assets) | $9,525,000 |
- Income Statement
Profit statement (Income Statement) or profit statement (Statement of Earnings), or income statement (Profit and Loss (P&L) statementt) - Statement of income and expenses of the company, as well as changes in capital as a result of economic activity for a certain period.
The difference between the firm's income and all expenses, including taxes, makes up net profit (Net Income), которую в некоторых случаях также называют Net Earning или чистой прибылью после уплаты налогов (Profit after Tax) during the reporting period
Consider the profit statement of the Coca-Cola company for 2007 year. All numbers in the report are in thousands (All numbers in thousands).
| Total income (Total Revenue) | 28,857,000 |
| Cost price (Cost of Revenue) | 10,406,000 |
| Gross profit (Gross Profit) | 18,451,000 |
| Operating costs (Operating Expenses) | |
| Research and development work (Research Development) | – |
| General, administrative and trading expenses (Selling General and Administrative) | 11,199,000 |
| Total operating costs (Total Operating Expenses) | 11,199,000 |
| Operating profit or loss (Operating Income or Loss) | 7,252,000 |
| Profit from continuing operations (Income from Continuing Operations) | |
| Total other income / expenses (Total Other Income/Expenses Net) | 1,077,000 |
| Profit before tax (Earnings Before Interest And Taxes) | 8,329,000 |
| Interest expense (Interest Expense) | 456,000 |
| Income before tax (Income Before Tax) | 7,873,000 |
| Tax costs (Income Tax Expense) | 1,892,000 |
| Share of participation of subsidiaries (Minority Interest) | – |
| Net income from continuing operations (Net Income From Continuing Op) | 5,981,000 |
| Net profit (Net Income) | 5,981,000 |
| Preferred shares and others (Preferred Stock And Other Adjustments) | – |
| Net profit, classified as ordinary shares (Net Income Applicable To Common Shares) | $5,981,000 |
Operating profit = Gross profit – Operating costs = 18,451,000 – 11,199,000 = 7,252,000
Net profit = Прибыль до налогообложения – Tax costs = 7,873,000 – 1,892,000 = 5,981,000
- Cash Flow Statement
Last document – cash flow declaration of a company (cash flows) for the entire reporting period. Capital flow statement (Cash Flow Statement) ascertains changes in the company's financial position during the reporting period.
Sometimes it can be called the Statement of sources of income and expenses. (Sources and Uses Statement).
Consider the report on the movement of capital of the Coca-Cola company for 2007 year. All numbers in the report are in thousands (All numbers in thousands).
| Net profit (Net Income) | 1,500,000 |
| Economic activity (Operating Activities, Cash Flows Provided By or Used In) | |
| Depreciation (Depreciation) | 307,000 |
| Adjustment to net income (Adjustments To Net Income) | 8,000 |
| Changes in accounts receivable (Changes In Accounts Receivables) | – |
| Changes in liabilities (Changes In Liabilities) | – |
| Changes in inventory (Changes In Inventories) | – |
| Changes from other types of business activities (Changes In Other Operating Activities) | (695,000) |
| Total capital flow from business activities (Total Cash Flow From Operating Activities) | 1,120,000 |
| Investment activities (Investing Activities, Cash Flows Provided By or Used In) | |
| Capital investment (Capital Expenditures) | (386,000) |
| Investments (Investments) | 55,000 |
| Other capital flows from investing activities (Other Cashflows from Investing Activities) | (226,000) |
| Final capital flow from investment activities (Всего Total Cash Flows From Investing Activities) | (557,000) |
Depreciation. Capital goods wear out over time, therefore, a certain service life is set for them, for example, 10 years. During this period, the value of capital goods is regularly written off.. This process of writing off the value of capital goods over a certain service life is called depreciation..
Amortization is not deducted from net income, but added to it, although at first glance it contradicts common sense. Let's figure it out, why it happens.
so, the Coco-Cola company sometime in the past acquired the means of production, that is, incurred expenses, related to this equipment. The capital flow statement says, that depreciation expenses for the reporting period were 307 million dollars. Understandably, that this money was not spent, but were written off and accounted for in the cost of manufactured products. That is, depreciation costs did not lead to negative capital flows. That's why, they were added to net income.
Similarly, the cost of decommissioned equipment, and the amount of deferred taxes is also added to the net profit, not subtracted from it.
Analysis of relative indicators (ratio analysis)
We reviewed three financial instruments. However, fundamental analysis is not limited to studying only absolute indicators., which are reflected in the balance sheet, income statement and capital flows. Analysis of relative indicators is of great importance for assessing the company's prospects (ratio analysis). Relative metrics not only reveal additional characteristics, shedding light on the true financial situation of the company, but also allow comparative analysis of companies with each other.
Despite significant differences in the system of published indicators in different countries and different sources, odds, used for this analysis, can be grouped as follows:
- Performance indicators of production activities (Operating Performance Ratio) measure the profitability of a firm and its ability to use assets.
- Liquidity indicators (Liquidity Ratios) characterize the firm's ability to meet short-term obligations, manage working capital.
- Financial soundness indicators (Financial Strength Ratios) determine the degree of risk, which may be associated with the method of forming the structure of borrowed and own funds, used to finance the firm's assets.
Earnings per share (EPS) – reflects the real level of profit and this value is higher than the amount of dividends. This value is of great interest to shareholders., as it gives an approximate estimate of the potential return of the stock. So the magnitude 14,23 talks about, what is per share Google based on the results of 2007 year had $14,23 net profit. EPS cannot effectively measure the economic value of a company, however still widely used in many annual reports.
Price / Earning Ratio (P/E Ratio) - analytical indicator, used to compare different companies. P / E = Price / EPS - the ratio of the market price of the share to the net profit (without income tax, dividends on preferred shares and other mandatory payments from profits, attributable to one ordinary share). The P / E value shows how many years a joint-stock company needs to work in order to, to get back its market value. P / E less, all the better. Если покупается stock с P/E=10, then it means, what you need 10 years for, to offset the initial investment from the firm's income.
R/S (Price/Sales – отношение рыночной цены к чистой выручке, attributable to one ordinary share).
Where is
Mcap – market capitalization of a company,
Net Sales – net proceeds, sales.
ROE (Return on Equity – доходность собственного капитала). This ratio is very common for assessing the return on investment by shareholders in an enterprise.. Equity for the purpose of calculating this ratio is the difference between all assets of the company and its liabilities. Capital income (ROE) shows the effectiveness of borrowed funds.
Dividend per share P/D. This ratio is most important for mature enterprises, who already have the opportunity to pay dividends and from which a rapid increase in market value is not expected.
Price–to–Book Ratio (Price - book value). This metric is used to find clearly undervalued stocks.. Usually, this figure is higher 1, that is, the market price of a share exceeds the real value of the company, which is natural, since the market price is intended to reflect not only the real, but also the expected income in the future. As a result of one reason or another, this indicator may be less 1. In this case, such a company can become a real candidate for purchase..
All relative indicators can be productively used to compare different companies., which belong to the same market sector. The fact, that different market sectors have different ranges of values of relative indicators. The table shows P / E and R / S ratios for some companies, belonging to three different sectors.
| R / E (Price/Earnings) | R/S (Price/Sales) | |
| Banks: | 12,74 | 2,74 |
| Wells Fargo & Company (WFC) | 12,17 | 1,30 |
| American Express Company (AXP) | 10,69 | 1,78 |
| Banco Bradesco SA. (BBD) | ||
| Internet information: | ||
| Google Inc. (GOOG) | 32,22 | 7,86 |
| Yahoo! Inc. (YHOO) | 27,05 | 3,73 |
| Bankrate Inc. (RATE) | 32,83 | 4,8 |
| Metallurgy: | ||
| United States Steel Corp. (X) | 12,9 | 0,48 |
| Reliance Steel & Aluminum Co. (RS) | 9,23 | 0,5 |
| Mueller Industries Inc. (MLI) | 8,99 | 0,4 |
Corporate news
In pursuit of timely receipt of information, do not forget about the quality of information. Check messages daily. Search for the company ticker and check, was there any news. What are today's income? Are they more or less than expected?
Possible alarms:
- Stocks drop on favorable news. This could mean, what has already been played on the good news, and when they became a reality, quotes returned to their usual level. Such situation, usually, talks about, that the shares are currently valued at their real value.
- Several "insiders", ie. company leaders, owning stakes in its shares, sell shares of their company. Should be kept in mind, that management representatives of the company may have reasons to sell its shares, which have nothing to do with the change in the value of the company. However, if three or four of the top managers and directors sell their shares, then this does not speak in favor of the company.
- The company carries out a secondary placement of shares. Usually companies take this step., if they think, who will receive the highest price for their shares at the moment. After a while, the price of these shares may decline..
Share buyback (Buyback)
Buyback – is the purchase by a company of its own shares on the open market. The shares in this case are called "redeemed shares" (treasury stock). Buybacks are considered a bullish trend indicator. Subsequently, they can be sold or withdrawn from circulation on the basis of a decision, adopted by shareholders. The importance of buyback to investors depends on the number of shares being repurchased. The higher the percentage of repurchased shares and shares outstanding, the more opportunities for profit. Often happens, that the date of the share buyback announcement coincides with the release of bad news. It can be like publishing disappointing quarterly or annual reports., and a negative assessment of the company's activities by well-known analysts. Simply put, the company tries to choose exactly that period of time for the buyback of its own shares, when its price is at its minimum values. It can only mean one thing: the company seeks to benefit from their low cost. Often, a share buyback announcement is followed by a split announcement. The buyback testifies to the fact, that the company is confident in the strength of its position. Share buybacks are usually carried out, if the company has a surplus of cash. When surplus cash is used to buy back, instead of expanding the company or paying dividends, shareholders often have the ability to defer capital gains and reduce tax payments in the event of a rise in the share price. The buyback may be just an attempt to manipulate the stock price.
Splitting of shares (Split)
Splits (Split) one of the most effective marketing tools. Companies usually split their shares to reduce their value and increase liquidity. Cleavage usually occurs 2:1 or 3:1. For instance, if you had 100 shares of any company $50, then after the split you will have 200 shares of this company by $25. Или если split 3:1 - have had 100 shares on $60, will become 300 shares on $20. In total, the shareholder receives nothing, but splitting makes the company attractive for investment, because. the share price has become significantly lower. It is important to understand that, what split – this is a consequence of the outstanding “work” Shares, and not vice versa. Stocks don't go up just because, that they are crushed, they split, because they have reached the top of their trading range.
Reverse split
The reverse split is being undertaken by companies, who want to increase the market value of their shares and attract investors. A rise in share price may become necessary, for example, in the following circumstances:
Listing procedures provide for a minimum share price. For example, NASDAQ sets the minimum price for one share $1. If the stock price falls below $1, the exchange sends a warning to the issuer with a requirement to increase the value of the share during the probationary period.
Besides, investment declarations of many investment funds require – buy and hold more expensive shares $10.
One way to increase the price of a stock is to use a reverse split.. For example, if the company had in circulation 2 million. Shares, and the split is carried out in a ratio of one to two, then the company will now have 1 million. Shares, and each owner 200 shares will become the owner 100. At the same time, the share price will rise by approximately 2 Times. The market capitalization of the company and the percentage of shareholders in the company remain unchanged..
Mergers And takeovers (Mergers & Acquisitions)
Merger - takeover (by purchasing securities or equity capital), merger of companies.
Acquisition - acquisition (for example, Shares), takeover of a company.
Large companies seek to find additional sources of expansion of their activities, among which one of the most popular is mergers and acquisitions. Merging is one of the most common development methods, which even very successful companies now resort to.
Classification of the main types of mergers and acquisitions of companies
In foreign business practice, various schemes of mergers and acquisitions of companies have long been formed.. The main features of the classification M&A can be attributed:
- nature of company integration;
- nationality of the merged companies;
- companies' attitudes towards mergers;
- way of pooling potential;
- merger terms, takeovers;
- merge mechanism.
Depending on the nature of the integration of companies, we distinguish the following types:
- horizontal mergers - consolidation of companies in the same industry, producing the same product or performing the same production steps;
- vertical mergers - combining companies from different industries, associated with the technological process of production of the finished product, ie. expansion by the buying company of its activities or to the previous production stages, down to the sources of raw materials, or for subsequent ones - to the final consumer. For example, merger mining, metallurgical and machine-building companies;
- generic mergers - business combinations, producing related goods. For example, company, making cameras, merges with the firm, producing photographic film or chemical reagents for photography;
- conglomerate mergers - combining companies from different industries without a production community, ie. a merger of this type is a merger of a firm in one industry with a firm in another industry, non-supplier, neither by the consumer, not a competitor. Within the conglomerate, the merged companies do not have any technological, no target unity with the main field of activity of the integrator company. Profiling production in this type of association takes vague outlines or disappears altogether. In turn, three types of conglomerate mergers can be distinguished:
- Mergers with product line expansion (product line extension mergers), ie. mix of non-competing products, sales channels and production process of which are similar. An example is the acquisition by Procter & Gamble, leading manufacturer of detergents, by Clorox - manufacturer of whitening products for linen.
- Mergers with market expansion (market extension mergers), ie. acquisition of additional sales channels, for example, supermarkets, in geographic areas, which were not previously serviced.
- Pure conglomerate mergers, not suggesting any generality.
Depending on the nationality of the merged companies, two types of mergers can be distinguished.:
- national mergers - business combinations, located within one state;
- transnational mergers - company mergers, located in different countries (transnational merger), acquisition of companies in other countries (cross-border acquisition).
Given the globalization of business, in modern conditions, mergers and acquisitions of not only companies from different countries are becoming a characteristic feature, but also transnational corporations.
Depending on the attitude of the management personnel of the companies to the merger or acquisition transaction, the company can be distinguished:
- friendly merges - merges, in which the management and shareholders of the acquiring and acquired (target, selected for purchase) companies support this deal;
- hostile mergers - mergers and acquisitions, in which the management team of the target company (target companies) disagree with the upcoming deal and is taking a number of anti-seizure measures. In this case, the acquiring company has to conduct actions on the securities market against the target company in order to take over it..
Depending on the method of combining potential, the following types of mergers can be distinguished:
- corporate alliances are the combination of two or more companies, focused on a specific separate line of business, providing a synergistic effect only in this direction, in other types of activities, firms act independently. Companies for these purposes can create joint structures., for example, joint ventures;
- corporations - this type of merger takes place then, when all the assets of the firms involved in the transaction are combined. Depending on whether, what potential is combined during the merger, can be distinguished:
- industrial mergers are mergers, in which the production capacities of two or more companies are combined in order to obtain a synergistic effect by increasing the scale of activities;
- purely financial mergers are mergers, in which the merged companies do not act as a whole, no significant production savings are expected, but there is a centralization of financial policy, contributing to the strengthening of positions in the securities market, in financing innovative projects.
Mergers can be carried out on a parity basis ("fifty fifty"). However, the accumulated experience shows that, that the “equity model” is the most difficult integration option. Any merger can result in a takeover.
In foreign practice, the following types of company mergers can also be distinguished:
- merger of companies, functionally related through the production or marketing of products (product extension merger);
- merger, resulting in a new legal entity (statutory merger);
- complete absorption (full acquisition) or partial absorption (partial acquisition);
- direct merge (outright merger);
- merger of companies, accompanied by an exchange of shares between participants (stock-swap merger);
- takeover of a company with acquisition of assets at full cost (purchase acquisition) and so on.
The type of mergers depends on the market situation, as well as from the strategy of the companies and resources, which they have.
Credit rating of companies
A credit rating is an official opinion on the creditworthiness of a business entity (it could be the state, government agency, financial institution or large company). The rating is assigned to a specific issue of the organization's debt obligations and gives rise to the compilation of its own credit risk with the risk of other companies.. Companies and banks with the highest credit ratings can represent themselves in their industry as elite organizations.
Ratings are established by specialized agencies. The main credit rating agencies are Standard & Poor’s и Moody’s (USA), as well as IBCA (United Kingdom).
Agency Moody’s uses different indicators for rating long-term and short-term debt obligations (which are priority debt with an original maturity of one year or less).
There are three ratings for short-term debt (for example, commercial papers), characterized by a relatively high ability of the issuer of the debt obligation to pay its debts. These are three investment categories: category 1, category 2 and category 3.
Moody's ratings for short-term debt
| Rating | Specifications |
| Category 1 | Excellent ability to pay off debts. Guaranteed alternative sources of obtaining liquid resources. Leading position in a stable industry. High return on capital used. High return on equity. High percentage coverage. Stable cash flow. |
| Category 2 | Stable ability to pay off debts. Sufficient alternative sources of obtaining liquid resources. Other characteristics are similar to those presented in the category 1, but less pronounced. Large fluctuations in profit growth and interest coverage ratio. |
| Category 3 | Acceptable ability to pay off debts. Sufficient alternative sources of obtaining liquid resources. Greater vulnerability to changes in the industry from market conditions. Income volatility can lead to the need for relatively high loans and an increase in the debt-to-equity ratio |
Issuers, which did not fall into any of these categories, классифицируются как uncategorized (substandard) and with increased credit (investment) risk.
Для долгосрочных долговых обязательств агентство Moody’s использует девять рейтингов – от Aaa (triple A) to With.
One of the features of the ratings, составляемых агентством Moody’s банков является то, that when a branch or subsidiary of a bank issues bonds in a certain country, the debt rating for this branch will be lower than the rating of the bank itself (parent company) and not higher than the state rating of a given country. For example, если бы международный банк с рейтингом Aaa выпустил долговые обязательства через дочернее предприятие в Австралии и если государственный рейтинг Австралии составляет только Ah, то эти долговые облигации отделения банка котировались бы не выше рейтинга Ah.
Moody's ratings for long-term debt
| R | Specifications |
| Aaa | Highest quality bonds. "Gold-cut" paper. The amount of the debt is secured. Interest payments are well protected by large profits. |
| Ah | High quality bonds. |
| BUT | The bonds have many attractive characteristics and fall into the medium to high quality categories.. Adequate collateral for principal and interest. |
| Wow | Medium quality bonds, which are neither highly secure, nor poorly secured. Principal and interest are currently adequately secured, but there is some uncertainty in the future. There are some speculative features when evaluating as an investment object. |
| And | Bonds, which, as investment objects, have speculative characteristics. Moderate interest and principal protection. |
| IN | Bonds, in which there are generally no signs of attractive financial investments. Protection of interest and the amount of invested funds for a long period of time is not sufficiently guaranteed. |
| Saa | Bad Reputation Bonds, raising doubts about the security of the payment of the principal or interest. For some of these bonds, payments may already be overdue. |
| Са | Bonds, which are highly speculative. Often unpaid. |
| With | Lowest rating. Bonds have very weak prospects for, that they will ever reach an investment (not speculative) rating. |
Note: To money market instruments, securities of insurance companies and preferred securities (preferred shares, etc.) other rating categories apply.
Standard credit ratings &Poor’s
Like Moody’s, агентство Standard &Poor’s является организацией по определению кредитного рейтинга для долговых ценных бумаг. The agency also compiles “sovereign ratings», representing an assessment of the state's ability to punctually meet its first-order debt obligations.
Определение агентством Standard &Poor’s commercial paper rating is a current estimate of the likelihood of punctual payment on a debt, which was issued with the original due date 12 months or less.
Standard short-term ratings & Poor’s
| Rating | Specifications |
| A-1 | Highest category. Stable safety performance. A-1 + rating indicates extremely stable safety performance |
| A-2 | Not so high, like A-1, but still satisfactory probability of timely payments. |
| A-3 | The likelihood of timely payments depends more on unfavorable circumstances, than with debt obligations rated A-1 and A-2. |
| IN | Probability of timely payment at the level of speculative securities. |
| With | Doubtful likelihood of making a payment |
| D | Payment is overdue |
Long-term debt ratings are grouped into two main categories:
- Ratings AAA, AA, BUT And ВВВ, investment grade;
- Ratings BB, IN, SSS, SS And With, speculative. The speculative category rating indicates, that the ability of the promissory note issuer to provide interest and principal repayment cannot be predicted with certainty.
In addition to the, существует два дополнительных рейтинга – C1 And D. Рейтинги от AA to SSS можно подвергнуть модификации, adding plus (+) or minus (-) to demonstrate the relative position of a debt within each rating category. Plus indicates a higher rating., minus - lower.
Standard ratings & Poor's for long-term debt
| Rating | Specifications |
| Investment categories | |
| AAA | Highest rating. Very high probability of interest payments and principal repayment. |
| AA | High probability of interest payments and repayment of the principal amount of debt. Only marginally (by the level of profitability) weaker than the AAA category. |
| BUT | High probability of interest payments and repayment of the principal amount of debt, but with greater dependence on unfavorable changes in circumstances and economic situation. |
| ВВВ | Normal Probability of Interest Payment and Principal Return, however, this probability may decrease with adverse changes in the environment. Less security of debt circumstances, than other investment grade ratings. |
| Speculative categories | |
| BB | Uncertainty of the general and long-term situation or the impact of unfavorable external developments may lead to the inability to pay interest on time and repay the principal amount of the debt.. (This rating also applies to debt, subordinate promissory note rated BBB). |
| IN | Currently being able to pay interest and repay principal, but much more likely to fail, than BB rating. ( This rating is also applied to debt, which is subject to a Tier 1 debt with a BBB or BB rating). |
| SSS | Has a definite tendency to default at present, and only favorable economic, business and financial conditions avoid this insolvency. (This rating also applies to debt with a BB or B rating.). |
| SS | Debt obligation, which is subject to a first order debt with a CCC rating. |
| With | Debt obligation, which is subject to a first order debt with a CCC rating. Also applies to debt obligations of the company, who filed for bankruptcy, but whose bonds are still in circulation. |
| Other categories | |
| C1 | Income bonds, on which no interest is paid. |
| D | Payments are suspended or bankruptcy filed with the possibility of termination of payments. |
IBCA ratings
Рейтинговая система IBCA для банков разработана для того, to help users make a conclusion about, whether the bank will receive support in case of financial difficulties (legal rating), or to assess the current activities of the bank (individual rating).
Legal ratings оценивают вероятность получения банком поддержки от государства или от своих акционеров в случае финансовых трудностей. Such an assessment is currently important for banks in such countries., like USA, Sweden, and Italy, and also the UK.
IBCA Legal Ratings
| Rating | Specifications |
| 1 | Bank, who has the appropriate rights and (or) importance and which, if necessary, will definitely be assisted by the state. State, wherein, should be among the leading developed countries. |
| 2 | Bank, who is not eligible for government support, but who could get such support if needed. The state must have significant funds to provide such assistance. |
| 3 | Bank, whose owners have a high reputation and significant resources, which would provide support to shareholders if necessary. |
| 4 | Bank, for whom the support of shareholders or authorities is likely, but not guaranteed (may be, for example, as a consequence, that shareholders do not have sufficient funds), |
| 5 | The bank cannot count on any outside help. |
Legal rating является показателем при оценке кредитного риска, but to make an opinion on the economic merits of the bank (such, as the quality of management and the share of equity capital) apply an additional set of ratings.
They, кто пользуется рейтингами IBCA, должны делать свои собственные заключения о банке по правовому и индивидуальному рейтингам IBCA.
IBCA Individual Ratings
| Rating | Specifications |
| BUT | Great balance. Favorable structure of the loan portfolio. Strong dynamics of high profits. |
| IN | The overall performance of the bank is better or the same, like its competitors. Execution of obligations, No significant problems. Healthy loan portfolio structure. |
| With | Normal lending structure, but with the presence of some alarming symptoms. Maybe, that the work efficiency is lower, than competitors. |
| D | A bank with a clearly low degree of operational efficiency. Low profitability. Balance below average. Debt repayment by the bank is possible, but it will take time. |
| E | Bank with serious problems, which require or, probably, require external support. |
Agency IBCA также разработало рейтинги для долгосрочных и краткосрочных долговых обязательств. Долгосрочные рейтинги BB и ниже присваиваются при наличии у обязательства спекулятивного характера. Long-term debt ratings may be supplemented with “+” or “-“ to indicate relative position within major rating categories.
IBCA Credit Ratings for Debt Issues
| Rating | For unsecured “seniors”(priority) long-term liabilities |
| АAA | Commitments, which have the lowest probability of investment risk. The opportunity to pay interest on time and repay the principal is so great, that adverse changes in business, economic or financial conditions are unlikely to significantly increase investment risk. |
| AA | Commitments, which have a very low probability of investment risk. Significant opportunity for timely payment of principal and interest. Adverse business changes, economic or financial conditions can increase investment risk, although not really. |
| A | Commitments, which currently have a low probability of investment risk. Stable possibility of timely payment of interest and repayment of the principal amount of debt, although adverse changes in business, economic or financial conditions can lead to increased investment risk. |
| BBB | Commitments, which currently have a low probability of investment risk. Normal opportunity to pay interest and repay the principal, although negative changes in business, economic or financial conditions are likely to increase investment risk, than in the case of bonds, which belong to the higher categories. |
| BB | Commitments, for which there is a possibility of increasing investment risk. The possibility of timely payment of interest and repayment of the principal amount of the debt exists, however, over time, it is subject to adverse changes in business, economic and financial conditions. |
| B | Commitments, who have investment risk. Timely interest payments and principal payments are not adequately protected from adverse business changes., economic or financial conditions. |
| CCC | Commitments, who have a tangible ongoing opportunity for default. Timely interest payments and principal repayment are dependent on favorable business, economic and financial conditions. |
| CC | Liabilities with a high degree of speculativeness or with a high risk of default. |
| C | Bonds, which currently cannot be redeemed. |
| Rating | Short-term ratings (to 12 Months)commitments, including commercial paper. |
| A1 + | Commitments, with the highest probability of timely repayment. |
| A1 | Commitments, with the highest probability of timely repayment. |
| A2 | Liabilities with a high probability of timely repayment, although this likelihood may be diminished by the impact of adverse business changes, economic or financial conditions. |
| B1 | Commitments, with normal probability of timely repayment, This probability is susceptible to negative business changes., economic or financial conditions to a greater extent, than for obligations of higher categories. |
| B2 | Commitments, the probability of timely repayment of which is highly dependent on adverse changes in business, economic or financial conditions. |
| C1 | Liabilities with a low probability of timely repayment. |
| D1 | Commitments, which have a high risk of redemption or can no longer be repaid at the present time. |
Wall Street Analyst Ratings
Most brokerage firms use a five-point scale. Terminology may vary slightly from firm to firm.
So, Merrill Lynch (MER) устанавливает рейтинги “buy”, “accumulate”, “neutral”, “reduce” And “sell”. Lehman Brothers (LEH) использует вместо “accumulate” term “outperform” , and “reduce” обозначается как “underperform”
| strong buy | actively buy |
| buy | buy |
| Outperform or accumulate | above the market average or accumulate |
| neutral or hold | neutral or keep |
| underperform or reduce | below the market average or cut |
| sell | sell |
| strong sell | actively sell |
Five-point scale
- strong buy
- buy
- neutral
- sell
- strong sell
