Morningstar Corporate Credit Ratings
Morningstar Corporate Credit Ratings
There needs to be a way to rate a companys creditworthiness relative to the broader pool of corporate borrowers. This idea has been embraced by the launch of Morningstar Credit Ratings. They award AAA ratings to companies that have flawless balance sheets and the ability to make a lot of money. Morningstar analyzes a company in four ways in order to arrive at credit ratings. They look at Business Risk, Cash flow cushion, Solvency Score, and the distance to default. In class we have touched on a couple of these ideas so it was good to see it put into actual use in the real world.
Business risk is basically broke down into seven elements, Economic Moat rating, uncertainty rating, size, product/customer concentration, stewardship grade, dependence on capital markets, and cyclicality of operations. All of these together are used together to calculate the amount of risk a business has of failing, or not operating for a long time.
Cash Flow cushion this basically shows if the company will have enough liquidity to meet its capital obligations in the future. The higher the ratio the more cushion a firm has to cover debts or other commitments that they have made. In class we learned how to show a statement of cash flows. Morningstar uses that same statement to show how much cushion a company has.
Solvency Score is a ratio-based system that Morningstar created to find out a companys financial health. This is found by looking at liquidity, Profitability, capital structure, and interest coverage. With finding these main points they can create a solvency score.
Last off is the distance to default, this measures a companys likelihood of financial distress. This is found when a companys assets fall below the value of liabilities. The final rating is when you combine all four of the following factors. Morningstars Ratings are accurate and