The Financial Health Rating (FHR) is a 0-100 score expressed across five risk categories, and each FHR is associated with an Estimated Probability of Default (EPD). The model benchmarks a company's financial characteristics against 40+ years of historical performance to identify how the company compares to firms that have defaulted, firms that have survived, and firms that have thrived.
Key model features
Financial statements only. The model is based entirely on financial statement information. It excludes analyst opinion, which can introduce inconsistency across ratings, and market-level inputs, which can cause arbitrary rating fluctuations.
Industry specificity. The model uses 24 industry-specific sub models, where most alternative services use 4 or 5. This granularity allows the FHR to assess financial viability accurately across sectors. For how industries are allocated, see Industry & Sector Allocation.
The three-stage model
The FHR is produced in three stages, each measuring a distinct dimension of financial health.
Measure Core Health. Is the company's operational performance sustainable? The Core Health Score (CHS) is an industry-specific measurement of a company's medium-term efficiency and competitiveness. Core Health is significantly influenced by profitability performance.
Measure Resilience. Does the company have the financial capacity to meet its short-term obligations? Resilience is assessed through three indicators: Leverage, Liquidity, and Earnings Performance.
Measure Financial Health. What is the likelihood of default or bankruptcy over the next 12 months? The FHR captures the dynamic interaction between Core Health and Resilience to answer this.
The interaction between the first two stages is the central mechanic of the model. A company with strong Core Health is less sensitive to its Resilience Indicators and is afforded more flexibility on leverage and liquidity. As Core Health deteriorates, Resilience becomes more important and has a greater impact on the final FHR. A company with poor Core Health and poor Resilience is at the highest risk of failure.
Core Health Score (CHS)
The Core Health Score measures a company's operational and structural efficiency, with both upstream and downstream views of profitability. It is calculated on a 0-100 scale from four performance categories:
Operating Profitability reflects profitability from core operations.
Net Profitability considers overall profit margins after all expenses.
Capital Structure Efficiency assesses how effectively the company uses its mix of debt and equity.
Cost Structure Efficiency evaluates whether cost structures are competitive within the industry.
Lower CHS scores typically stem from weak profitability metrics. Even small margins of 2 to 3 percent can leave companies vulnerable to operational setbacks. Cash flows, while important, do not heavily factor into the CHS calculation. The emphasis is on earnings potential and financial fundamentals.
Figure 1: Core Health Categories
Figure 2: Measuring the Core Health Score (CHS)
Resilience Indicators
The three Resilience Indicators measure a company's short-term capacity to absorb financial shocks. They are reported as Weak, Adequate, or Strong rather than on a 0-100 scale.
Leverage depicts the extent to which a company's assets are dependent on debt as compared to equity.
Liquidity measures the company's ability to survive short-term crises that drain its asset reserves.
Earnings Performance assesses the company's efficiency in managing internal constraints and opportunities to generate the profitability needed to meet internal and external obligations.
As described above, the Resilience Indicators interact dynamically with Core Health. This interaction is a key pillar of the FHR's predictive ability.
Figure 3: Dynamic Interaction of Core Health and Resilience Indicators
The FHR and Estimated Probability of Default (EPD)
The three-stage analysis produces the FHR, a 0-100 score expressed across five risk categories. Each FHR is associated with an Estimated Probability of Default (EPD), which is the percentage probability that the company will default within the next 12 months.
Figure 4: Risk Categories and EPD Ranges
FHRs have proven exceptionally accurate at predicting default risk. More than 90 percent of defaulters, in a study of over 1,500 defaults, have FHRs that fall in the High Risk or Very High Risk categories.
Figure 5: FHR Distribution at Default for 1,500+ defaults
For how to interpret your own risk category, see Understanding Your Risk Category.
How CHS and FHR work together
Because CHS and FHR measure different time horizons, they can diverge in informative ways. A company with a low CHS can still have a strong FHR when its short-term liquidity and other resilience factors are robust. The FHR dynamically adjusts to current financial health by overlaying resilience indicators onto the CHS.
Together, these two scores drive the Quadrant Analysis, where FHR represents estimated default risk and CHS drives operational sustainability. Companies are plotted within quadrants to evaluate their overall financial health in a visual, strategic way.
Industry-specific Indicator Reports
Standard FHR Reports apply to most industries. For banking, insurance, and financial diversified companies, RapidRatings produces specialized Indicator Reports instead. These reports accommodate the unique financial statement structures of these sectors while maintaining consistency in analysis flow. Unlike standard reports, Indicator Reports do not include CHS or FHR metrics.
For detail on how these sector-specific reports work, see Rating Banks, Financial Diversified, & Insurance Companies.
How clients use CHS and FHR
Three common patterns:
Supplier risk management. Clients use the FHR to monitor near-term default risk and the CHS for insight into a supplier's operational reliability over the medium term.
Portfolio and partner analysis. Clients integrate FHR trends and CHS insights to evaluate and compare counterparties across industries.
Custom evaluations. Clients adapt grading scales and quadrant positioning to match their own internal benchmarks and operational thresholds.
Summary
CHS measures medium-term operational health, driven by profitability, cost structures, and efficiency.
FHR integrates CHS and short-term resilience indicators to assess 12-month default risk.
Resilience factors gain weight as CHS deteriorates, which is why short-term financial safeguards matter most when operational fundamentals are weak.
Standard FHR Reports apply to most companies. Banks, insurance, and financial diversified companies receive Indicator Reports instead.