Publicly Traded Company Risk: 4 Myths that May Surprise You
"I don't have any public company risk." Have you ever told yourself that?
You might be very surprised. We work with credit managers and procurement professionals at leading companies around the world, and here’s a consistent finding: Public companies usually account for far more dollar risk exposure than our customers think.
- So how much public company risk exposure do you really have in your customer portfolio or supplier base?
- What accounts for more dollar risk exposure … your publicly traded companies, or your private ones?
Here's a look at 4 of the most persistent myths about public company risk – debunked.
Myth 1: “Public Companies rarely go bankrupt, so there is little need to spend time and resources monitoring them.”
Fact: As of March 2016, public company risk is up more than 80% since the start of the Great Recession in December 2007, according to our analysis of more than 40,000 public companies globally over 9 years.
The overall public company bankruptcy rate, usually about 1%, is expected to hit at least 3% in 2016 across all industries. In specific sectors, such as energy or retail, that rate is much higher. For example, in March, in metals and mining, public company risk has increased more than 178% since the Great Recession.
What if even one of those is your major customer or supplier?
Bottom line: Overall public company risk is up more than 70% since 2007 – and some industries are drastically worse. Analyze your public company risk exposure to see where you stand.
Myth 2: "Private companies are more important to monitor than public companies, because there are more “hidden risks” associated with them."
Fact: It’s important to think about total dollars at risk, not the number of companies you are following.
While the universe of private companies is of course far larger, public companies represent giant risk: an average 53% of dollar risk exposure for our customers (which are mostly medium and large businesses.) For some companies, public company risk exposure is as much as 80%.
In addition, the same methods that work to monitor private companies for stress aren’t effective for public companies. Private companies can be assessed by analyzing their trade payment behaviors, but our research shows that payment data doesn’t work to predict financial distress for public companies.
Why? Large companies usually can and do pay their bills right up through bankruptcy. Analysis of financial statements, ratios and trends, as well as market capitalization value and volatility, all are critical to understanding public company risk.
Bottom line: Both public and private companies can be risky -- and public companies often account for the majority of dollar risk exposure. Look beyond the total number of companies, assess where your dollar risk lies and use the right method to monitor and manage your customers and suppliers.
Myth 3: “Public companies aren’t my customers.”
Fact: It’s easy to underestimate the number of public companies you’re doing business with.
Public company organizations are large and complex. Divisions of larger public companies often do business under a different name than the parent. Every time a private company is bought or sold, the ownership changes, and the new ownership information is not likely to be updated on a customer’s initial credit application. In addition, the parent company risk is the most important to assess, as it affects all components of the business.
Bottom line: Public company risk is easy to underestimate. Organizations are large, complex, and risk hides in plain sight.
Myth 4: "The information on public companies, such as financial statement data, is easy to gather, analyze, assess and monitor."
Fact: Public company data is available from various sources, but it’s what you do with the data that really counts. The most critical credit management task is staying on top of current trends and making quick, effective credit decisions – not spending time gathering and managing a wide range of public company information (ratings, ratios, financial statement filings, management comments, etc.).
We’ve found it takes at least 3 hours to fully analyze a public company, starting from scratch:
• Find the financials for the current period as well as prior years to see trends
• Input the financials
• Standardize the reporting
• Create your formulas to calculate ratios and spreads
• Do your analysis
That’s even without adding quantitative analytics to show risk trends and probabilities of financial stress, or comparing the company to its peers.
Not only is it tedious and easy to make mistakes, but this process is often unnecessary to begin with. You can set up flags to alert you to whether a company is even risky enough to need a review. Time is money. Leave the gathering, monitoring and computing to an automated service.
Bottom line: Spend time making decisions, not processing data.
Overall, the financial stress of even one public company can do major damage to the health of your customer and supplier relationships — and revenue. Because of their size, ability to hide financial distress behind timely payments, and the effort it takes to monitor all of the relevant information, it takes a unique approach to stay on top of them.
Disregard the myths — and find the facts you need to stay ahead of your biggest risks.
CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of more than 56,000 global public companies.
At the core of CreditRiskMonitor’s service is its 96%-accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z”-Score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $150 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.