Industry & Sector Allocation

Conventional approaches to modeling financial risk often use a "one size fits all" method, relying on a small number of variables and a single model to understand all companies. RapidRatings’ approach is a significant step forward from these approaches. Our research has made it clear that the profile of a healthy company varies from industry to industry. We deploy 22 different industry-specific models to ensure that we are analyzing financial health as accurately as possible. In addition, we examine 68 different perspectives when we measure financial health, making our model more robust and less dependent on any given metric.

Detailed industry specificity is largely responsible for our superior accuracy. Our emphasis on modeling industry-specific risk is a powerful differentiator. By recognizing that the profile of a successful company varies depending on industry, we have developed a more accurate measure of financial health with our ratings.

Selecting an Industry Model

To assign a company to the best industry model, our analysts review the firm's business activity and assign it to the correct industry model utilizing a mapping schematic that guides the correct placement of the industry code. This is true for both public and private companies.

Specificity in Industry Allocations

There is always a trade-off between industry granularity and sample size when developing systematic models for financial health. On one hand, using many different models assures a close fit between any given company and its model. Using fewer models, however, allows more data to calibrate each model, making the model more stable and robust. We use 22 different industry-specific models, which is far more than competing approaches, many of which use a "one size fits all" approach. We are fortunate to have an extremely rich and sizable dataset that allows us to ensure all 22 models remain stable and robust over time. As a result, we provide unprecedented granularity and accuracy.

Companies allocated to a common model may not look exactly the same, but they will share similar quantifiable risk profiles. For example, the Wholesale Trade model is used to provide ratings guidance on companies distributing goods from many different sectors of the economy. These firms may work with different partners in different geographies that sell different products. Still, because they share very similar profiles when it comes to characteristics such as working capital utilization, fixed assets, and profitability, they can be effectively benchmarked using our Wholesale Trade model.

Our 22 industry models are shown below.

Sector Classifications

Completely separate from the RapidRatings industry model classification process, sector assignment is closely linked to Russell Index Sector Allocations. The purpose of assigning a sector allocation is to support peer analysis. For example, in the FHR Report, each company is compared to the leaders and laggards in its sector.

A list of the current RapidRatings sectors is below.