This article explains sensitivity analysis and how it helps decision makers manage exposure and identify opportunities for growth.
Wiserfunding uses sensitivity analysis as a quantitative risk assessment tool to model the impact of changing external and internal factors, allowing us to measure the resilience and vulnerability of portfolios or individual companies under different scenarios.
The Resilience & Sensitivity framework assumes four scenarios: base, optimistic, mildly pessimistic, and severely pessimistic.
The base case reflects business as usual under forecasted macroeconomic conditions.
The optimistic scenario assumes positive market conditions, where demand and turnover increase by around 15%. With short-term costs remaining the same, this leads to higher operating and net income, and therefore higher retained earnings and equity. Current and total assets also increase, while short-term liabilities remain unchanged.
The mildly pessimistic scenario represents moderate stress, where unexpected market changes reduce demand and lead to a 15% drop in turnover. With short-term costs assumed to stay the same, this reduction directly lowers operating and net income, as well as retained earnings and equity. At the same time, current liabilities increase, while the short-term asset structure remains unchanged.
The severely pessimistic scenario represents a high-stress event, assuming companies face adverse market conditions whereby turnover is estimated to decrease by 35%.
Applying macroeconomic and company-specific assumptions - calibrated to economic forecasts - we recalculate financials and risk metrics for each economic condition. Outputs such as the SME Z-Score, Probability of Default, and Bond Rating Equivalents provide a comparative view across all four scenarios.
Sensitivity analysis is valuable because it allows us to test performance under different possible scenarios, providing foresight into risks before they materialise. Anticipating shocks offers a decisive advantage by highlighting the vulnerable and resilient parts of a business.
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