The 68 ratios we use to produce the FHR are divided into different categories. In this document, we'll take you through the details of the divisions.
Background: Why 68 ratios and how are they applied?
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. We differentiate ourselves by providing many additional perspectives that enable more robust analysis of a company’s operations. This is achieved by applying 68 different financial ratios which address the company’s overall profitability, cost structure, capital structure efficiency, working capital efficiency, leverage, liquidity and earnings performance.
In order to calculate the FHR, we apply a two-fold process which involves dynamically integrating our Core Health model with Resilience Indicators.
The Core Health model assigns proprietary weightings to 62 efficiency ratios according to one of our 24 unique industry models. The weightings, in turn, result from exhaustive and continuing analysis of our proprietary database. The sum of these weightings becomes the rated company’s Core Health Score (zero = worst to 100 = best)
Next, we incorporate 11 Resilience Indicators (5 existing and 6 additional ratios) which measure a company’s leverage, liquidity and earnings performance. They interact dynamically with the Core Health Score to indicate lower or higher short‐term risk
This final step results in an overarching risk score known as the Financial Health Rating (zero = worst to 100 = best)
Note: We use a different set of inputs for banks, insurance firms, and financial diversified firms because these firms have unique financial line items in their reports, but we follow the same modeling framework.
Step 1: Performance Category Scores
Each of the 62 weighted efficiency ratios underlying the Core Health Score are allocated into one of four performance categories: Operating Profitability, Net Profitability, Cost Structure Efficiency, and Capital Structure Efficiency. Each performance category is assigned a score between zero and 100 (zero = worst to 100 = best).
Operating Profitability: provides an upstream scan of the efficiency in generating profitability
Operating Profit / Capital Employed
Operating Profit / Shareholder Equity
Operating Profit / Total Revenue
Operating Profit / Total Assets
Operating Profit Before Depreciation / Capital Employed
Operating Profit Before Depreciation / Total Revenue
Operating Profit Before Depreciation / Total Assets
Operating Profit Before Depreciation / Shareholder Equity
Gross Profit / Capital Employed
Gross Profit / Total Revenue
Gross Profit / Total Assets
Net Profitability: provides a downstream scan of the efficiency in generating profitability
Operating Profit After Tax / Capital Employed
Operating Profit After Tax / Shareholder Equity
Operating Profit After Tax / Total Revenue
Operating Profit After Tax / Total Assets
Net Profit After Tax / Capital Employed
Net Profit After Tax / Shareholder Equity
Net Profit After Tax / Total Revenue
Net Profit After Tax / Total Assets
Net Profit Before Tax / Capital Employed
Net Profit Before Tax / Shareholder Equity
Net Profit Before Tax / Total Revenue
Net Profit Before Tax / Total Assets
Cost Structure Efficiency: is based on a number of ratios incorporating variables such as cost of goods sold, staff costs, other operating expenditures, depreciation, interest expense, and corporate income tax relative to a base such as total revenue and total expenditures
Cost of Goods Sold / Total Revenue
Cost of Goods Sold / Total Cash Operating Expenditure
Depreciation / Total Revenue
Depreciation / Total Cash Operating Expenditure
Interest Expense / Total Revenue
Interest Expense / Total Cash Operating Expenditure
Interest Expense / Staff Costs
Other Operating Expense / Total Revenue
Other Operating Expense / Total Cash Operating Expenditure
Staff Costs / Total Revenue
Staff Costs / Total Cash Operating Expenditure
Tax Expense / Total Revenue
Tax Expense / Total Cash Operating Expenditure
Operating Profit / Interest Expense
Interest Expense / Total Liabilities
Total Revenue / Inventories
Total Revenue / Staff Costs
Operating Profit after Tax / Interest Expense
Capital Structure Efficiency: examines the main elements of the capital structure (current liabilities, term liabilities, total liabilities, equity, current assets and total assets) relative to various bases such as capital employed, operating revenue, total liabilities and total assets
Term Liabilities / Capital Employed
Total Liabilities / Total Revenue
Shareholder Equity / Total Assets
Total Liabilities / Total Assets
Current Assets / Total Assets
Current Assets / Total Liabilities
Current Liabilities / Total Assets
Current Liabilities / Total Liabilities
Total Revenue / Capital Employed
Total Revenue / Shareholder Equity
Total Revenue / Total Assets
Other Ratios: Additional ratios which contribute to the overall FHR but are not allocated to a specific Performance Score
Current Assets / Current Liabilities
Quick Assets / Capital Employed
Quick Assets / Current Assets
Quick Assets / Current Liabilities
Quick Assets / Total Assets
Quick Assets / Total Revenue
Working Capital / Capital Employed
Working Capital / Total Revenue
Working Capital / Total Assets
Total Revenue / Working Capital
Step 2: Resilience Ratios
The 11 resilience ratios are designed to fine‐tune the Core Health model and sharpen our estimates of the probability of default. Of those 11 ratios, 5 ratios are already in the Core Health model and an additional 6 resilience ratios bring the total number of tested ratios to 68.
Leverage: is a solvency metric that depicts the extent to which a firm’s assets are dependent on debt as compared to equity
Total Debt / Total Assets
Liquidity: measures the ability of the firm to survive any short‐term crises that drain its asset reserves
Cash / Current Liabilities
Cash From Operations / Current Liabilities
Working Capital / Total Assets
Earnings Performance: is focused on profitability characteristics with respect to meeting internal and external obligations
