FHR - Model Description

The FHR™ System is a set of multivariate econometric pseudo panel data models that serve as a multi-dimensional, multi-time period risk and opportunity calculator and predictor. The System assembles insight into a corporation's intrinsic financial health and ability to remain competitive in future environments. The ratings are scientifically derived, weighted risk scores based on the level of significance of the 62 financial ratios in predicting financial deterioration, distress, turnarounds and success in each industry. The FHR™ System contains 24 global industry-specific models each employing modeled empirical distributions of the same 62 financial ratios. These performance drivers are based on approximately 30 years of data from more than a dozen countries covering more than 300,000 public and private companies, thereby contributing to very high model stability.

1. Industry-Specific Risk: Industry-specific risk is identified by variations in the weights of each of the financial ratios in terms of their statistical significance in anticipating distress and success across time. The variation in the weights across industries for these 62 dimensions of the measurement of financial performance represents a unique insight into industry-specific risk.
2. Weights: The ratings are econometrically-derived scores based on the ratios' measuring financial performance across 6 key areas of corporate activity: (1) Debt Service Management, (2) Leverage, (3) Working Capital Efficiency, (4) Sales, (5) Cost Structure and (6) Overall Profitability (including GP Margin, EBIT, Net Profit and NOPAT).
3. Data Source: All our inputs are sourced from empirical data (10-K reports and 10-Q reports for US filers). As such, all FHRs™ are free from market pricing inputs, analyst estimates and qualitative inputs.

General Motors: FHR vs. S&P and Moody's Ratings Trends

The graph above delineates the difference between our ratings and the ratings of the major agencies for GM. Rapid Ratings™ downgraded GM to sub-investment grade in June 2000, whereas S&P and Moody’s waited until May 2005. Moody's and S&P are the trademarks of their respective companies.