Descending Mt. Risk: How a Company Can Travel from High to Low Risk
This issue's key takeaways:
● Company risk can be spotted early, with the right tools
● Financial health resources such as the FHR, core score health, and a quadrant analysis offer a nuanced, multi-layered risk profile that companies can act on
● These analytic tools are uniquely accurate, predictive, and reliable because they aren’t based on proxy data
● Early detection gives companies more time and flexibility when mitigating potential risk
Risk trivia:
As you’ll see in today’s Stat of the Month, 2025 has been a busy year of bankruptcy filings for larger US corporations.
So, bankruptcy brainiacs, which major craft retailer filed for bankruptcy in March 2024, and then again in January 2025?
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Snapshot: Spotting, understanding, and responding to financial risk
By James H. Gellert, Executive Chair, RapidRatings
Companies with high and very high risk profiles aren’t doomed to fail, but major changes may be in order. For counterparties evaluating these companies, major oversight is almost certainly in order. This month we’ll highlight useful risk assessment resources and discuss why detecting risk early puts companies in a stronger position to navigate out of high-risk territory.
For those evaluating the risks of these companies, often their corporate customers (buyer evaluating supplier), detecting risks early can be essential to the relationship and the health of both companies.
The risk-reward
In many areas of life, access to a comprehensive risk score would be intriguing but impractical. Sure, it is helpful to have restaurant and hotel reviews, contractor recommendations, and references for a babysitter, but reviews aren’t consistent and are very human, meaning biased, anecdotal, and subjective.
Business is different. Numbers and results, unlike feelings and emotions, are quantifiable. They can be accurately measured, compared, cross-referenced, sorted, and predicted. Additionally, they can be produced consistently over time, across companies from different industries, countries, of different sizes, public or private, etc.
In business, scrutinizing risk, particularly financial risk, is not only worthwhile, it’s essential. Financial health analytics translate complex numbers into narratives that companies can understand and act on. Every action a company makes, every decision management makes, and every result can be seen in its financials if one looks properly.
Looking properly can really only be done in depth and in scale, with technology. A proactive risk-mitigation strategy helps stable companies avoid financial volatility, while giving vulnerable, high-risk businesses more pathways to recovery. Let’s dig into how.
Spotting risk starts with financial health data
Financial health refers to the financial strength or weakness of a company—simple enough. However, to determine that and detect risk, you need a multi-layered view of a company’s financial condition. The resources and methodology needed to do that are much more elaborate, but they provide the clarity and foresight needed to spot vulnerabilities and make confident decisions.
The FHR®
One is the FHR®, a predictive analytics tool that gives companies an objective picture of the financial health of their suppliers or themselves. The FHR provides a single, all-encompassing score that represents a company's short-term risk status and probability of default based on understanding its longer-term strengths and weaknesses.
The algorithmic process behind the FHR is the most advanced financial health evaluation system, used by thousands of supply chain, third-party risk, and other professionals to evaluate risk programmatically.
The FHR scale ranges from 1 to 100; the higher the score the healthier a company’s financial condition. A rating of 100 indicates very low risk levels and a default probability of less than 0.007%. That’s excellent. Conversely, a score below 20 has very high risk levels and a default probability over 13.3%. That’s concerning.
Over the last twenty years, more than 92% of companies that have failed have been rated at 40 and below in our High-Risk and Very High-Risk zones. Sometimes, I hear supply chain or procurement professionals look at an estimated probability of default of, say, 10% and go “oh that’s not that bad.” In financial markets, a 10% default probability is considered exceptionally risky.
Think of it like this: If you make 100 supply chain decisions this week and ten of them fail, how long would you keep your job? That’s a 10% probability of default, and that’s why suppliers with low FHRs, and high probabilities of default, represent risks that need to be managed proactively.
Core Health Score
Risk management isn’t just about short-term risks. Long-term risks or strengths of companies are a foundational part of the short-term perspective. The FHR incorporates the Core Health Score, a measurement of efficiency and sustainability over a medium-term timeline (2-3 years). It assesses a company’s cost structure efficiency, working capital efficiency, and how well it uses its resources to generate profitability relative to its asset size, revenue, equity, and more.
These elements speak to a company’s core. The core is then built upon by resiliency measures that indicate whether a company is stronger or weaker in the short term than in the long term.
Both the FHR and the Core Health Score function like a multifaceted, multidimensional medical examination. Imagine if your smart watch not only told you your variable heart rate efficiency and maybe your glucose levels, but also performed a constant MRI and CT scans.
The big impact of underlying conditions
When measuring a company as a key supplier or other counterparty, isn’t it better to see right into the core health rather than its surface appearance?
Here’s another way to think about it. During COVID, people with underlying health conditions, say asthma, cancer, or diabetes, were more susceptible to having COVID be fatal. People with stronger underlying health were better able to fight off the disease and survive.
Companies were the same.
Those with underlying financial health weaknesses, typically from poor Core Health, couldn’t survive and failed. Companies with strong Core Health and resulting strong Financial Health fought off the challenges and survived.
With Financial Health Ratings, we evaluate health using algorithms powered by over 12 million company-years of financial data across 24 industry-specific models.
It’s pretty powerful, and it’s pretty helpful.
Quadrant analysis: Risk you can see
These challenges may sound esoteric, but in practice, a company can’t successfully pivot away from a position of high risk without first identifying and understanding the scope and consequences of that risk.
This pertains to the company at risk as well as any entity taking on that company’s risk. This could mean a business selling TO that company (and making a credit decision about the terms – how much to sell, what the payment terms and pricing should be), buying FROM that company (how much to purchase, how quickly to pay, and what quality, delivery, product, and innovation expectations to set), lending TO that company (such as bank financing, bond purchases, or private credit) and more.
A ubiquitous financial risk perspective is now the quadrant view that marries the Financial Health Rating and the Core Health Score. This analysis aids in that process by balancing an evaluation of short-term default probability with a medium-term viability assessment.
The results are depicted in a visual framework that places a company in one of four quadrants —A, B, C, or D— with each quadrant representing a general tier of financial health standing.
“A” companies are strong from both short and long-term perspectives. “B” companies are weak from a long-term perspective but have enough short-term resilience characteristics to be okay in the short term but are nevertheless weak fundamentally. “C” companies are weak long and short-term. “D” companies, more rare, are very strong in the long term but wrestling mightily with short-term risks.
A quadrant analysis adds context to a company’s risk status and can reveal financial red flags that, if ignored, can spell disaster.
Red flags in real life
The example of automotive supplier Wolfspeed Inc. is useful here. Financial health analytics captured clearly worsening financial conditions that went unheeded. The company was declared high-risk as early as 2022, based on an FHR that had dropped under 40.
A pattern of decline continued from there, evident in deteriorating Core Health, increased default probability, and a quadrant analysis result that placed Wolfspeed in Quadrant C, the quadrant for companies with the lowest profits, weakest balance sheets, and highest default risk.
By 2025, they had filed for Chapter 11 bankruptcy protection. Despite clear high-risk warning signs years earlier, necessary adjustments weren’t made, and in the end, the company and the supply chain it serves suffered greatly.
Turning detection into correction
So, how can companies with high-risk suppliers maintain control and manage those risk levels? Here are options companies may be able to implement based on how early the risk has been detected:
● Find alternate sourcing
● Diversify your supplier base
● Increase inventory to create a buffer
● Adjust timelines and production schedules
● Collaborate with the supplier to stabilize risk
● Amend payment terms for suppliers
● Invest in critical/sole supplier via an escrow
It’s not magic, it’s data. Use it
There are advanced tools designed to help companies detect, evaluate, and mitigate financial risk. Leveraging those tools can be the difference between prolonged success and filing for bankruptcy.
That’s why businesses should continuously monitor risk. Companies must actively look for risk indicators because failing to notice and evaluate risk is no different from being indifferent to it.
Get the full picture. Download our one-pager, The Red Flag Report: Wolfspeed Files for Chapter 11
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Stat of the Month: 371
One day, I promise the Stat of the Month will be a harbinger of economic optimism and hope. Alas, today is not that day.
That’s because, according to research by S&P Global, US H1 bankruptcies have hit a 15-year high, with 371 filings in the first 6 months of 2025, the highest total for the first half of the year since 2010 and an 11% increase from a year earlier.
Trivia Answer:
The answer is Joann, the fabrics and craft retailer, with listed debt of approximately $2.4 billion and assets of $2.2 billion.
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If you’re curious about how RapidRatings offers the most accurate and comprehensive financial data analytics in the industry, check out RapidRatings.com to learn more.
