This article serves as a glossary for the terms featured on a risk assessment generated in the Wiserfunding portal.
Below is a glossary of risk metrics and financial trends/ratios:
| SME Z score | The score is a number between 0 and 1000 that summarizes the risk profile of companies. The lower the number, the riskier the company. This represents a point-in-time, independent and objective assessment of the credit risk of a counterparty and it is grouped into 5 areas (distressed 0-100, high risk 101-250, medium risk 251-450, low risk 451-700, outstanding>700). |
| Probability of Default | The SME Z-Score is transformed in Probability of Default (PD). This is the probability that the company would become insolvent or go bankrupt within the next 12 months. |
| Loss Given Default | Loss given default or LGD represents the portion of the loan that is not expected to be recovered if a borrower defaults. Considering the strong correlation between PD and LGD, we have developed several functions to estimate the LGD given a certain SME Z-Score, the level and type of assets, the cash flow and the sector conditions. |
| SME Z-Score Trend | The score is a number between 0 and 1000 that summarizes the risk profile of companies. The lower the number, the riskier the company. This represents a point-in-time, independent and objective assessment of the credit risk of a counterparty and it is grouped into 5 areas (distressed 0-100, high risk 101-250, medium risk 251-450, low risk 451-700, outstanding>700). |
| Probability of Default Trend | The SME Z-Score is transformed in Probability of Default (PD). This is the probability that the company would become insolvent or go bankrupt within the next 12 months. |
| Loss Given Default Trend | Loss given default or LGD represents the portion of the loan that is not expected to be recovered if a borrower defaults. Considering the strong correlation between PD and LGD, we have developed several functions to estimate the LGD given a certain SME Z-Score, the level and type of assets, the cash flow and the sector conditions. |
| Bond Rating Equivalent | Using a methodology invented by Prof. Altman in 1989, we derive the Bond Rating Equivalent (BRE) for each company by mapping our score to the S&P rating scale. The highest BRE is AA and the lowest is D. |
| Turnover | Total earnings from daily operations from sale of goods and services to customers also to known as Revenue/Sales. |
| Total Assets | All current and non-current assets owned by the firm based on the purchase price. |
| EBIT | Earnings Before Interests and Taxes, also recorded in the income statement as operating profit/loss. It is the firm’s profitability from its operations. |
| EBITDA | EBITDA is essentially net income with interest, taxes, depreciation and amortization added back to it. |
| Total Debt | Total debt is the sum of all short- and long-term liabilities. |
| Cash & Cash Equivalents | This variable represents the cash available at a company at a certain time. It includes: currency, coins, checks received but not yet deposited, checking accounts, petty cash, savings accounts, etc. |
| Interest Expense | This variable represents interest payable on borrowings recorded on the income statement. |
| Net Income | These are the net profits of a company after taking into account all costs and taxes. Alternatively referred to as Profit After Tax. |
| Shareholder's Equity | This variable includes all items under shareholder funds (e.g. Share capital, Share premiums and retained earnings) |
| Retained earnings | This is the undistributed portion of net income cumulated over the years of operations. |
| Days Receivable | Average number of days it takes a company to receive payment for a sale. A high number suggests that a company is experiencing delays in receiving payments. That can cause a cash flow problem. A low number indicates that the company is getting its payments quickly. |
| Days Payable | Average number of days a company needs to pay its bills and obligations. A high number can delay making payments and use the available cash for short-term investments as well as to increase working capital and free cash flow. However, higher values may not always be a positive for the business as it may signal a cash shortfall and inability to pay. |
| EBITDA Margin | A performance metric that measures a company's profitability from operations. EBITDA is an earnings measure that focuses on the essentials of a business: its operating profitability and cash flows. The EBITDA margin is calculated by dividing EBITDA by turnover. |
| Total Debt/ Total Assets | The total-debt-to-total-assets ratio is a leverage ratio that shows the degree to which a company has used debt to finance its assets. If a company has a total-debt-to-total-assets ratio of 0.4, 40% of its assets are financed by creditors, and 60% are financed by owners' (shareholders') equity. |
| Debt / Equity Ratio | This ratio compares a company’s total liabilities to its shareholder equity and can be used to evaluate how much leverage a company is using. Higher-leverage ratios tend to indicate a company with higher risk to shareholders. |
| Equity Ratio | The Equity Ratio measures the proportion of the total assets that are financed by stockholders, as opposed to creditors. A low equity ratio will produce good results for stockholders as long as the company earns a rate of return on assets that is greater than the interest rate paid to creditors. |
| Tangible fixed assets/ Total Assets | Shows in percentage terms the portion of the company's total assets that is tied up with fixed assets. It shows the extent to which the company funds are frozen in the form of fixed assets, such as property, plant and equipment. It represents the portion of total assets that cannot be used as working capital. |
| Intangible fixed assets/ Total Assets | Measures the proportion of a company's goodwill, which is an intangible asset, to its total assets and is a factor in that company's valuation. The ratio quantifies a company's brand value and other intangible aspects of its valuation. |
| Interest Coverage ratio | The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes and D&A (EBITDA) during a given period by the company's interest payments due within the same period. |
| Return on Equity (ROE) | Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. ROE is considered a measure of how effectively management is using a company’s assets to create profits. |
| Return on Assets (ROA) | Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient a company's management is at using its assets to generate earnings |
| Liquidity Ratio | A liquidity ratio is a type of financial ratio used to determine a company’s ability to pay its short-term debt obligations. The metric helps determine if a company can use its current, or liquid, assets to cover its current liabilities |
| Current Ratio | The current ratio compares all of a company’s current assets to its current liabilities. These are usually defined as assets that are cash or will be turned into cash in a year or less and liabilities that will be paid in a year or less. The current ratio helps investors understand more about a company’s ability to cover its short-term debt with its current assets. |
| Net Debt | Net debt is a liquidity metric used to determine how well a company can pay all of its debts if they were due immediately. Net debt shows much debt a company has on its balance sheet compared to its liquid assets. Net debt shows how much cash would remain if all debts were paid off and if a company has enough liquidity to meet its debt obligations. |
| Net Debt /EBITDA | The net debt-to-EBITDA ratio is a debt ratio that shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant. It is similar to the debt/EBITDA ratio, but net debt subtracts cash and cash equivalents while the standard ratio does not. If a company has more cash than debt, the ratio can be negative. |
| Debt Service Coverage Ratio | The debt-service coverage ratio (DSCR) is a measure of the cash flow available to pay current debt obligations. The DSCR shows investors whether a company has enough income to pay its debts. |
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