Credit rating determination

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Q:  We are curious about how the Credit Rating is arrived at in the simulation.  We have shown positives in every category for at least the last two quarters but yet we have a credit rating of 3.  Can you please shed some light on this for us?

 

A:  An emergency loan from the bank will qualify a company for a number 3 credit rating.  Otherwise, ratings are evaluated by credit analysts at the end of each year.  Generally, a company with an emergency loan during the past year or two will not be upgraded.  The factors affecting credit ratings are shown below, but only three or four quarter's performance on most of them will not have much impact.

Many factors normally are considered by a credit analyst in judging the financial standing of a business firm. Among those that will be used to determine your firm's credit rating are the demonstrated ability to:

1. Meet repayment obligations on bank loans and other commitments, and avoid emergency borrowing.

2. Show significant growth of total resources as reflected in the value of total assets.

3. Increase the market acceptance of your product as shown by an increasing share of the market.

4. Show a reasonable return on the book value of owners' investment in the firm (Income to Equity).

5. Pay a reasonable proportion of profits to stockholders in the form of dividends. The Business Policy Game stockholders expect to receive a growing stream of dividends amounting to between 30 and 60 percent of earnings.

6. Maintain a capital structure that shows a reasonable relationship between borrowing and net worth (Bonds to Equity).

7. Generate sufficient profits so that there will be a comfortable margin over and above the bond interest requirements (Interest Coverage).