RATING OF MANUFACTURING COMPANIES :
The factors generally considered for rating of manufacturing companies are as under:
Industry Risk
It is defined as the strength of the industry within the economy and relativity to the economic trends. It is evaluated on the basis of factors like business cyclicality, earnings volatility, growth prospects, demand – supply projections, entry barriers and extent of competition and nature and extent of regulation.
Company’s industry and market position
The company’s sales position in its major fields and its historical background of its market position is analyzed along with ability to sustain/increase market shares; brand strengths and position; price leadership and distribution and marketing strengths/weaknesses.
Operating efficiencies
Ability to control costs, productivity efficiencies relative to others, labour relationship, extent of forward and backward integration, access to raw materials/markets, and technology.
Accounting Quality
Financial statements are adjusted for non-standard accounting treatments. Overall evaluation of the accounting policies employed and the extent to which they understate or overstate financial performance and position. These include analysis of auditor’s qualifications, revenue recognition, depreciation policy, inventory evaluation, funding for pension liabilities, undervalued assets etc.
Financial flexibility
Evaluation of the company’s financing needs, plans and alternatives, its flexibility to accomplish its financing programmes under stress without damaging creditworthiness.
Earnings protection
The key measurements which indicate the basic long term earnings power of the company including return on capital, profit margins, earnings from various business segments, sources of future earnings growth, coverage ratios etc.
Financial leverage
Relative usage of debt and levels of debt appropriate to different types of businesses, utilization of long and short term sources of funds, management of working capital.
Cash flow adequacy
It is the relationship of cash flows to leverage and the ability to internally meet all cash needs of the business. It measures the magnitude and variability of future cash flows relative to debt servicing obligations and other commitments such as group company funding, BIFR packages and contingent liabilities. This analysis goes into the inherent protective factors for expected cash flows of the company and the sensitivity of these cash flows to changes in variables like raw material costs and selling prices.
Management evaluation
The record of achievement in operations and financial results, strategic and financial planning, commitment, consistency and credibility, overall quality of management, line of succession, strength of middle management and organization structure and its linkage with the operating environment and management strategies.