This is the fifth and final part of our in-depth look at the components of our proprietary FRISK® score, a dynamic, mathematically-driven solution which has proven to be 96% accurate in predicting U.S. public company bankruptcy risk during a 12-month period.
Click on the links below to read our earlier installments:
Part 1: The Wisdom of the Markets,
Part 2: Financial Ratios
Part 3: Bond Agency Ratings, and
Part 4: Crowdsourcing of Credit Managers
With the help of financial ratios, stock market data, bond agency ratings and crowdsourcing, a company’s credit or procurement team gains the information needed to assess bankruptcy risk and make educated, high-stakes financial decisions to prevent loss.
What elevates the CreditRiskMonitor service is the blend of these factors, reaching a higher plane of analytical understanding. It’s one thing to have the data at hand; harnessing the learnings from each of these metrics, synthesizing those findings into an easy-to-understand format and adding in crowdsourcing data when available – that is what makes the overall result, our proprietary FRISK® score, an invaluable solution for professionals.
It is true that most of these metrics can be used individually, and with some success. They are all insightful tools, most with a long track record of being valuable risk indicators. Yet our research over the past two decades has determined that when this information is considered together, the accuracy in assessing a public company’s risk of bankruptcy increases exponentially.
One Holistic View > Four Individual Parts
Let’s say, as a risk professional with access to these metrics – the financial ratios, bond agency ratings and stock market data which form the foundation of the FRISK® score – that you are tasked to assess bankruptcy risk on your own. You use each of these metrics separately, and when you do, you find yourself staring at conflicting information: the financial ratios speak to stability, while the stock market information is less optimistic. Now what?
Indeed, not only do you have to go through the work of calculating financial ratios, tracking bond agency credit moves and gauging stock market sentiment, but you have to put them all together in some coherent way. You have to balance one off of the other. It's not a task that can be done on the back of an envelope; it requires deeper consideration, in conjunction with complex math and historical data to backtest against to get the formula right.
CreditRiskMonitor’s dynamically weighted calculations and understanding of the credit industry make the most out of this data for you as a comprehensive service. On top of that, we layer in the crowdsourcing of credit managers, which is akin to asking your industry peers – our subscribers – for a second opinion. If credit and procurement professionals like yourself are performing like minded research, those mirrored behaviors are red flags and the FRISK® score incorporates that data into the overall equation.
We put the puzzle pieces together and provide a single, 96% accurate metric that alerts you to where your attention is most needed. Rather than having to manually perform the tracking and calculating on your entire portfolio, our single score allows you to zero in on the companies that could cause financial harm in a fraction of the time.
This is why the FRISK® score’s aggregation of data promotes accurate bankruptcy prediction, minimized confusion and opportunity to save time and money. The score takes the guess work out of weighing the calculations, choosing the right ratios and making sense of conflicting information, so you get best-in-class accuracy every time. Most important, the FRISK® score can help you to put your efforts to their best use, protecting your company from counterparty risk.