How To Determine The Creditworthiness Of A Firm?
It is essential to review the financial statement of the company for the people who want to determine the business’s creditworthiness. The financial market is usually unpredictable, and nobody can firmly predict anything in the market. After the halt on the market for about two years, the market leaders could not foresee that catastrophe would arise and significantly affect the entire market. Today also, the market has to recover entirely from the impact. Investors need to be convinced to take a risk on their investment portfolios.
Even though the market has witnessed a spike in investment, particularly in the corporate sector, investors are still muddled about “How To Determine The Creditworthiness OF A Company.” Because of such situations, investors are reluctant to consider investing in the company.
In this blog, we will give you a better understanding of how to determine the company’s creditworthiness. But before going further, let us know about the concept of credit rating.
In simpler terms the commercial credit ratings is a numerical assessment of the firm’s creditworthiness. The ratings by ICRA are fully independent, and after analysing all the aspects of the commercial firm the ratings are assigned.
Furthermore these ratings have a big influence on the market value of the firm. Jump into the pool of information Let us know everything about the credit rating process and its benefits
What Is Credit Rating?
The financial instruments, particularly the debt instruments issued by corporations, governments, entities, organizations, and individuals, are analyzed. It helps analyze the creditworthiness of the company or the organization in the market.
Determine the Creditworthiness of the company or the organization
It is essential to determine the creditworthiness of the business. There are several ways to measure the creditworthiness of the company. These calculations yield ratios that can be compared to accepted business patterns for data from other similar businesses.
Following are some of the measures to determine the creditworthiness of the company:
- Using the current ratio: It is easy to determine the business's liquidity by comparing the ratio between the existing assets and current liabilities. The assets converted to cash within one year are known as the current assets. This includes cash, securities, inventory, and receivables. In simple words, the ratio between the current liabilities and the current assets is called the current ratio.
- Using the quick ratio: It is the same as the current ratio. It just considers the cash, accounts receivable and marketable securities. Due to business variations, the ratio should be used carefully. The ratio can also be used in conduction with the other data due to business variations.
- The Debt To Equity Ratio: It helps compare the liabilities with the owner's total equity. It helps in indicating the finance o the company. The business is considered to be at risk if the ratio increases. It helps in continuing the operations for the long term.
- The Receivables Turnover Rate: The total amount of receivables is divided by the total amount of collections for a specific time. The business may be in a problem collecting the accounts when there is an increase in the receivables turnover.
Conclusion
We are sure the points mentioned above will help you determine the company’s creditworthiness. ICRA is here to help you to determine your creditworthiness.
Take the first step towards a better future with ICRA.