The Company Watch
The H-Score® measures a company’s financial health. It is derived from a company’s published financial results and quantifies how closely the accounts resemble those of companies which subsequently failed.
Displayed graphically over five years on a scale if 0 (weakest) to 100 (strongest). Companies with a H_Score® of 25 or less are placed in the Warning Area. Not all companies in the Warning Area will fail, however, of the companies that do fail, the vast majority were in the Company Watch Warning Area prior to collapse. The H-Score® analytics look at a company’s financial position from a number of aspects including profit management, working capital management, liquidity, and how the assets are funded.
Probability of Distress (PoD®)
The PoD® is the probability that a Distress Event will occur within 1 year or within 3 years, expressed as a percentage. A Distress Event could be failure, reconstruction, or some other event indicative of acute financial distress (for example, Chapter 11 in the US).
Where possible, Company Watch keeps records of worldwide corporate distress event occurring amongst the populations of companies for which it calculates H-Scores.
The derivation of a company’s PoD incorporates:
- The company’s H-Score®
- The overall rate of distress across the full population of companies
- The historical rate of distress at each point on the H-Score® scale
- Economic indicators such as the growth in GDP
Based on the annual (10-K) and quarterly (10-Q) financial reports of US companies, the Company Watch TextScore does not consider financial information directly, but is based on a statistical approach, looking only at the text accompanying a company’s financial accounts.
Using advanced machine learning techniques to identify the patterns of words contained within the 10-K and 10-Q fillings, the TextScore enables our customers to cut through the corporate jargon found in so many reports. Machines can spot patterns in data quickly and efficiently – much faster than a human ever could. We have put thousands of 10-K and 10-Q statements through this process to train our models to differentiate between companies that went on to fail and those that did not: instead of reading hundreds of financial reports, our customers are now able to understand key components of these reports at a glance.
The Risk Rating places a company on a scale of one of ten risk categories. These broader risk divisions are very useful for portfolio segmentation to help you focus your efforts on the areas of your business that are most critical. A rating of 10 corresponds to the highest risk and a rating of 1 the lowest. The scale is configured so that the risk doubles as the risk rating increases. (for example a company with a risk rating of 5 is twice as likely to suffer distress as a company with a risk rating of 4).
The Credit Limit is a benchmark figure provided as part of a credit analysis. It gives an indication of the exposure to which a company is likely to be able to sustain to a given creditor.
The business risks that you face are unique, and your analytics should be as well. We have helped clients tailor credit limits to reflect the industries they work in, their risk appetite and payment horizon.
Using the H-Score®, (the measure of the company’s financial strength) and the PoD®, it also takes into account the number and value of any County Court Judgments recently served against the company.
Company Watch Credit Limits for use in conjunction with a Credit Insurance Policy are approved by most credit insurers including, for example, Atradius, Euler Hermes and QBE.