SVILUPPO DIMENSIONALE E CRESCITA PER LINEE ESTERNE Percorso Executive in Strategia & Finanza
Focus group
Come cambiano i paradigmi di valutazione d'azienda nell'attuale scenario 29 ottobre 2015 Villa Valmarana Morosini
Challenges of international data and benchmarking Valentino Pediroda modeFinance SRL email: valentino.pediroda@modefinance.com twitter: @vapediroda tel: +39 331 1921018
SUMMARY
Topic How can we provide a credit scoring with is coherent and comparable across different sectors and countries?
THE MORE
What is credit rating? PHILOSOPHY Credit rating is an opinion of the economic and financial quality of a company based on relevant risk factors. A different probability of default (within one year, two years and three years) is associated with each credit rating class (indicated by symbols: traditional AAA to D). MORE Rating Class
Rating Macro c lass
AAA AA
Healthy companies
A BBB BB
Balanced companies
B CCC
Vulnerable companies
CC C D
Risky companies
Assessment The company's capacity t o meet its financial commitments is extremely strong. The company shows an excellent economic and financial flow and fund equilibrium. The company has v ery strong creditworthiness. It also has a good capital structure and economic and financial equilibrium. Difference from 'AAA' is slight. The company has a high solvency, The company is however more susceptible t o t he adverse effects of changes in circumstances and economic conditions than companies in higher rated categories. Capital structure and economic equilibrium are considered adequate. The company's capacity to meet its financial commitments could be affected by serious unfavourable events. A company rated 'BB' is more v ulnerable t han companies rated 'BBB'. The company faces major ongoing uncertainties or exposure t o adverse business, financial, or economic conditions. The company presents v ulnerable financial signals. A dverse business, financial or economic conditions will be likely t o impair t he company's capacity t o meet its financial commitments. A company rated 'CCC' has a dangerous disequilibrium in its capital structure and financial fundamentals. Adverse market events or inadequate management are highly likely to affect the company's solvency. The company shows signals of high v ulnerability. In t he event of adverse market and economic conditions, t he company's strong disequilibrium could increase. The company shows considerable danger signs. The company's capacity t o meet its financial commitments is v ery low. The company no longer has t he capacity t o meet its financial commitments.
Main problems: -‐ different accounting standards;
-‐ different economical behavior for the different countries; -‐ different economical behavior for the different sectors; -‐ missing of financial data for the bankrupted companies; -‐ “holes” in the financial data (BS, P&L). How can we develop a credit score model for overstepping those elements? 5
Different accounting standards Mainly two different standards exist: Continental and Anglo-Saxon. The main difference is the classification of the costs. Cost of goods sold Gross profit Anglo-Saxon
Other operating costs EBIT
P&L account
Row material
Continental
Cost details
Employees
EBITDA
Services
EBIT
Different accounting standards How to minimize the differences based on the different accounting standards in the credit scoring? Mainly we have to develop two different models with different financial ratios: Ratio for financial interest coverage: EU: EBIT/Interest paid UK: GrossProfit/Interest paid Important: in many cases the chosen accounting standards don’t depend on the country, but it is a choice made by the company. (Netherland, Russia, etc.)Ă ďƒ IT difficulties.
Different accounting standards Mainly two different standards exist: Continental and Anglo-‐Saxon. The main difference is the classification of the costs
8
Different countries we would like to have a credit scoring coherent between the different countries, so the user doesn’t loose time for the companies’ comparison, ……….but…….
Solution settings of the ratios in order to homogenize the evaluation and make it coherent between the different countries. ROE > 20% in India à optimum ROE ROE > 35% in Turkey à optimum ROE
9
Small problem……. We cannot do this for every ratio! If you observe to the total leverage (ratio which represents the total debts of a company), the distribution is different between the countries….but debts are debts
Solution settings of the ratios which are depending by the particular economical behavior of the country.
10
Different sectors Of course, we cannot forget to take into account even the commercial sectors financial behavior inside the selected country
Solution Similar to the country tuning
11
Small number of bankrupted companies Unfortunately not in every countries there are information on defaulted companies. This missing of information limits the typology of models for credit scoring which can be used.
Solution Impossible to use models which are based on understanding the differences between active companies and defaulted (machine learning methods). No possible to translate a model from a country to another one. We can use only methods which try to mimic the financial analyst behavior. 12
“Holes” in the financial data Unfortunately not in every countries there are information on defaulted companies. This missing of information limits the typology of models for credit scoring which can be used.
Solution Impossible to use models which are based on understanding the differences between active companies and defaulted (machine learning methods). No possible to translate a model from a country to another one. We can use only methods which try to mimic the financial analyst behavior. 13
MORE: Multi Objective Rating Evaluation
Look at fundamentals
MORE looks at the fundamentals and at them equilibrium
Profitability Liquidity
Solvency
Performance
Interest Coverage
Rating evaluation
Efficiency
Capital adequacy
The model
Ratios definition and choice
Statistical Analysis
From quantitative definition to qualitative definition
Fuzzy Logic
Financial and economical equilibrium
Multi Criteria Decision Making
RATING EVALUATION
modeFinance: ratio choice Category Solvency ratios
Description Solvency ratios help investors assess a company’s ability to meet its longterm obligations. They also explain how the company has been financed (debt or equity).
Liquidity ratios
These ratios are used to determine whether a company is able to pay off its short-terms debts obligations
Profitabilit y ratios
The profitability of a company depends not only on the margins generated, but also on the assets that must be employed to generate those profits
Interest coverage ratios
These ratios are used to determine how easily a company can pay interest on outstanding debt
Constraint s on efficiency
modeFinance set many tests to check if the company is able to generate adequate margins from financial and operating management
Weights Examples importanc e Debt to Equity Debt to Assets
1st
… Quick ratio Current ratio … Return on Equity Return on Investment … EBIT on Interest Paid Profits on Interest Paid … Financial P/L, P/L before or after tax, EBIT, etc.
2
th
2nd 3th 4th
Comments Using the statistical models and the finance theory, MORE weights in different way the importance of the financial ratios. MORE underlines the financial and economical equilibrium of the companies, overall looking at capital structure, earnings and financing.
Fuzzy logic
Penality rating class
D
C C B
A AAA
Ratio value
We directly translate the financial ratio value into a rating classes: with high non-‐linearity and without monotone problems
Thanks to all the information in Bureau van Dijk products (80 Millions of companies in more than 200 conutries) , we can understand the economical behaviour of every ratio, sector, country
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MORE  Confidence  Level
Even if there are missing data, we can provide the MORE rating with the confidence level associated. Confidence level is a reflection of the variations in availability of financial data across Europe due to filing regulations and suggests the degree of financial details that the MORE rating is able to take into account for each company. The Confidence level represents the ratio between the available information over the total information.
We subdivided the database in 9 sectors for each country.
By performing for each sector an accurate statistical analysis, which highlights the differences among the economies of different countries, we have selected about 15 indicators (which change from sector to sector).
MODEL
VALIDATION OF THE CREDIT SCORE MODEL
VALIDATION
UK, Germany, Finland, Italy: almost same results (Gini Index > 70) The model is able to recognize the bankrupted companies with the same accuracy in different countries: comparable credit scoring evaluation
modeFinance: Â MORE
MORE model Explanation with Example.
modeFinance: MORE Let’s analyze one French company, pioneer of the solar industry since 1979
Since March 2012, Photowatt is part of EDF. The company is 100% owned by EDF ENR, France’s leading provider of photovoltaic roof panels for private homes, businesses and local governments. EDF ENR is a subsidiary of EDF Energies Nouvelles. Since 03-07-2012 the company is in liquidation «Liquidation judiciaire» Liquidateur: ME BERMOND J.Y. Administrateur judiciaire: la selarl BAULAND, GLADEL & MART
modeFinance: MORE The properties of the company are: 1.
It’s a French company
2. It’s a manufacturing company
modeFinance: MORE 3. It’s a company with financials according to continental accounting principles - NO Cost of good sold - NO Gross Profit - All operational costs together - EBITDA item (otherwise it’s Anglo-Saxon)
modeFinance: Â MORE MORE model is not unique! MORE is composed of more than 20.000 different models for: - Every country - 9 sectors in every country - 1 model for Anglo-Saxon and 1 for Continental accounting - 1 model for every ratio took into account (~15 per company)
MORE MODEL
modeFinance: MORE For analyzing one French company, operating in the industrial sector, with financials according to continental accounting principles, MORE model requires the computation of 15 financial ratios; some of them are:
Ratio
Definition
Leverage
Shareholder’s Funds / (Non Current Liab .+ Current Liab.)
Current ratio
(Current assets - Current assets: stocks)/Current liabilities
ROE
P\L for period / Shareholder’s Funds
Sales to Total Assets
Sales/Total assets
EBITDA/Sales
EBITDA / Sales
…
…
modeFinance: MORE PHOTOWATT
modeFinance: MORE PHOTOWATT
When we compute the ratio, a simple question rises: Are the values adequate (or not) for a company like Photowatt? Ratio Leverage Quick ratio ROE % Sales to Total Assets EBITDA/Sales
Definition Shareholder’s Funds / (Non Current Liab .+ Current Liab.) (Current assets - Current assets: stocks)/Current liabilities P\L for period / Shareholder’s Funds %
31/03/2011 31/03/2010 31/03/2009 -3.24
4.79
1.52
0.67
0.97
0.50
-159.99
-126.01
12.00
Sales/Total assets
1.38
0.72
0.97
EBITDA / Sales
-0.08
0.02
0.11
Let’s analyze two ratios in 2010 (for example): Leverage & Quick Ratio. Are those values good enough for this kind of company?
modeFinance: MORE Leverage : 4.79
Interpretation
A credit analyst, expert in French industrial sector, would say the company is weak because: - When leverage is negative, the company is distressed (Shareholder’s Funds negative) - The best value of leverage is in the range 0 - 1 - In the average, a balanced company in the same industry has a leverage between 1,5 and 2,5 - A leverage is acceptable when lower than 5 - A value of 10 (or higher) is extremely risky. MORE evaluates the company as a credit analyst would do: 4,79 corresponds to a “weak” opinion about the company
0
1.5
5
10
modeFinance: MORE Quick Ratio: 0.97
Interpretation
A credit analyst, expert in French industrial sector, would say the value is NOT bad because: - The lower the value the worst the company - The best value of quick ratio is in the range 2 - 2.2 - In the average, a balanced company in the same industry has a quick ratio between 1.0 and 1.1 - An high quick ratio is NOT synonymous of healthy company MORE evaluates the company as a credit analyst would do: 0.97 corresponds to a “close to balanced” opinion about the company 0 1.0 2 4
modeFinance: MORE In order to interpret the goodness of every value, MORE applies a different model to each ratio à MORE doesn’t deal with the ratio’s values but with their transformation
Ratio Leverage Quick ratio
Definition Shareholder’s Funds / (Non Current Liab .+ Current Liab.) (Current assets - Current assets: stocks)/Current liabilities
31/03/2011 31/03/2010 31/03/2009
-3.24
4.79
1.52
0.67
0.97
0.50
-159.99
-126.01
12.00
ROE %
P\L for period / Shareholder’s Funds %
Sales to Total Assets
Sales/Total assets
1.38
0.72
0.97
EBITDA/Sales
EBITDA / Sales
-0.08
0.02
0.11
…
…
…
…
…
modeFinance: MORE MORE
The colors of the dots correspond to our opinion about the ratio’s value (fuzzy)
WHERE WE ARE
Trieste, Italy AREA S cience and Technology Park The leading S cience and Technology Park in Italy. Established in 1978. Key point: only companies w ith high innovative technologies. modeFinance Headquarter B uilding A AREA S cience Park, Padriciano 99 34012 Trieste ITALY Ph. +39 040 3755337 -‐ Fax +39 040 3755176 info@modefinance.com -‐ www.modefinance.com