Conventional approaches to modeling financial risk often employ a one-size-fits all approach, 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. RapidRatings employs 24 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, which makes 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 for RapidRatings. By recognizing that the profile of a successful company varies depending on industry, we have developed a more accurate measure of financial health in our FHR.
Selecting an Industry Model
In order to assign a company to the best industry model, RapidRatings analysts review the business model of the company in question 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).
When submitting financial data to RapidRatings, please be sure to include your company's SIC/NAICS code(s), or a brief description of your company's primary business activity.
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. RapidRatings utilizes 24 different industry-specific models, which is far more than competing approaches, many of which employ a “one size fits all” approach. We are fortunate to have an extremely rich and sizable data set which allows us to build all 24 models to be stable and robust over time. As a result, RapidRatings provides unprecedented granularity and accuracy.
Companies allocated to a common model may not look exactly the same but 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, selling different products. Nevertheless, 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.
The right model for a company depends on its core operations rather than the market in which it operates
Our 24 industry models are shown below.
|Rapid Ratings Industry Models
|Food, Drink and Tobacco
|Energy and Water
|Timber and Paper, Printing
|Sale of Motor Vehicles
|Chemicals and Fibers
|Non-Metallic Processing and Extraction
|Metal Processing and Extraction
|Restaurants and Accommodation
|Metal Articles and Equipment
|Transport and Communication
|Banking and other Financial
|Investment Goods & Consumer Durables
Completely separate from the RR 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.
Industry Models are used to produce an FHR. Sector labels are used to benchmark firms operating in a common marketplace
A list of the current RR sectors is below.
|RapidRatings Sector Classifications
|Aerospace and Defense
|Autos and Related Equipment
|Food, Beverage and Tobacco
|Builders and Building Materials
|Business Products and Services
|Metals and Fabrication
|Multi‐Sector and Misc
|Oil ‐ Drilling and Equipment
|Oil ‐ Integrated
|Oil ‐ Producers
|Drugs and Pharma
|Electronics and Semiconductors
|Equipment and Machinery