Credit Risk FAQ

In Valuatum's model, ratings are calibrated so that only about one-third of companies fall into "A" categories — consistent with the distributions used by international credit rating agencies such as Standard & Poor's. By contrast, some competing services classify around 90% of companies into "A" categories.

The difference does not reflect a different assessment of actual risk, but rather how ratings are distributed across the overall population of companies.

Valuatum's credit rating distribution

Asiakastieto's rating distribution (owner of Proff.dk)

Yes. Different providers use different models, weightings, and data sources, so the same company may receive different ratings across different services. These differences don't indicate one assessment is wrong — they reflect varying risk evaluation approaches. A credit rating is always a model-based estimate of how a company compares with others and with observed historical risk patterns.

Valuatum's credit rating is based on a statistical risk model trained on extensive historical data including financial statements, payment default records, and bankruptcy data. The rating is not based on a single financial metric, but on an overall assessment considering solvency, profitability, liquidity, balance sheet structure, industry risk level, and several other indicators — using the XGBoost machine-learning algorithm.

Typically the most important factors include:

• Solvency, especially the equity ratio
• Profitability, such as return on capital
• Liquidity — the size of cash reserves relative to business volume and short-term liabilities
• Balance sheet structure — how assets are distributed between cash, receivables, and other items
• Industry risk — how frequently companies in that industry fail on average

A strong rating usually requires that a company has both healthy profitability and sufficient financial buffers relative to the risks of its business operations.

Not on its own. Company-specific factors remain very important. However, industry risk influences how high the bar is for achieving a strong rating — companies in higher-risk industries need stronger financial metrics to reach the same credit rating as those in lower-risk industries. Every industry contains both highly rated and weakly rated companies.

Treat it as a condensed risk signal, not as a final judgment about a company's quality. It indicates how the company statistically compares with other companies and what level of risk is associated with its financial ratios, balance sheet, and industry. At its best, a credit rating helps management understand which factors strengthen the company's position, which limit financing capacity, and what areas could improve the risk profile.

Cash reserves and liquidity demonstrate how well a company can withstand disruptions, delays, and unexpected events. If a company has a large business volume but small cash buffers, its ability to cope with temporary problems may be limited. The model examines cash relative to revenue, expenses, short-term liabilities, and other balance sheet items. Strong liquidity supports the rating because it improves resilience to disruptions.

Profitability is an important factor, but it does not determine the credit rating on its own. A company may have good results yet still receive a modest rating, for example if:

• Equity is small relative to the scale of the business
• Cash buffers are thin
• The industry carries higher-than-average risk
• The balance sheet does not provide sufficient protection against potential disruptions

A credit rating primarily measures a company's ability to absorb risk. Even a profitable business can appear vulnerable from a lender's perspective if a single bad year would have a large impact.

The equity ratio indicates relative solvency, but does not show how large the company's financial buffer is in absolute terms. A company may have a high equity ratio, but if the balance sheet is small while business volume is large, the owners' ability to absorb risk may still be limited. From a lender's perspective, the absolute level of equity and protective assets also matters.

Yes, it can. Industry risk is an important part of credit risk assessment, because the frequency of bankruptcies and payment defaults varies significantly across industries. If an industry is riskier than average, a company typically needs stronger financial metrics to reach the same credit rating as a company in a lower-risk industry. This does not mean the industry alone determines the rating, but it raises the bar.

Not necessarily. A weak or below-average rating does not automatically mean that the company's business is poor or that it is in immediate danger. It usually means that statistically the company's risk level is higher than that of better-rated companies — due to factors such as a higher-risk industry, small absolute equity, limited cash buffers, or the size of the balance sheet relative to business scale.

A rating changes when a company's financial metrics or business environment change. For example: profitability improves or weakens, equity increases or decreases, cash reserves strengthen or decline, industry risk changes, or business volume grows faster than the company's financial buffers. In some industries, economic cycles have a strong additional impact.

Yes, it can. A credit rating can usually be improved by strengthening the company's ability to absorb risk. In practice, the most important actions often include:

• Strengthening equity
• Increasing cash buffers
• Improving profitability
• Strengthening the balance sheet relative to the scale of the business
• Improving risk management and the predictability of business operations

Especially in higher-risk industries, strong equity and sufficient financial buffers become particularly important.

Yes. In addition to the credit rating, many other factors influence access to financing — banks' own risk policies, regulation, collateral requirements, market conditions, and industry cycles. A well-managed company may face stricter financing terms than its operational quality alone would suggest. A credit rating is an important part of the assessment, but not the only factor in lending decisions.