Probability of Default and Market Value

 

1. What is the Probability of Default and Market Value Report?

 

Probability of Default represents the probability that a company fails to fulfill its financial obligations against its creditors, suppliers and financial institutions, respectively. 

The Market Value of a company represent the price for which that company could be sold to willing buyers, based on its historic financial results.

2. How to read the Probability of Default and Market Value Report

The report include two distinct sections: the Probability of Default of the company, and its Market Value. Furthermore, the report presents specific statistical data for each section.

Probability of Default:

PD represents the probability that a company fails to repay its liabilities due to creditors during the next period. The probability is computed based on the financial results of the company during the latest fiscal year.

In its statistical meaning, Probability measures the theoretical percentage certainty that a certain event would occur. Therefore, a high probability of a negative event occurring, means a high risk for the company, but not an absolute certainty that the company will enter default.

The probability of default is also computed for the three prior years, and the adjacent graph indicate the company's evolution of this measure.

Aside from the computation of the probability, the graph presents a statistic with all Romanian companies, grouped by their Probability of Default intervals (PDs have been computed for all companies, and then groups have been set-up) and the number of companies, which entered default procedures, from each interval. This statistic help users to categorize any company into a PD group, see the total number of companies within that group, and the number of companies which went into default for that respective group.

 Probability of Default:  Probability of Default:
Company Value:
 

The Company Value represents the amount for which the respective company could be sold to potential and willing buyers, based on the financial results of the company and its Balance Sheet as per the latest financial year.

The value of the company is obtained solely from its financial situation, and does not represent a price obtained from some effective transactions.

The value of the company is also computed for the prior 3 financial years. The adjacent graph show the company's value evolution.

Aside from the computation of the company's value, the graph presents a statistics with all Romanian companies, grouped by their Market Value intervals (MVs have been computed for all companies, and then groups have been set-up). This statistic help users to categorize any company into a MV group, see the total number of companies within that group, lower or higher MVs.

 Probability of Default:  Probability of Default:

3. How does the Probability of Default and Market Value Reports help you

  • Probability of Default as computed for the latest 4 years
     

    Computation of the Probability of Default for the latest 4 years offers you an image of the risks associated with the company in the next period. It is important to see if the trend is ascending (the associated risk increases) or descending (the risk lowers). The values of the probability are correlated with the financial performance of the company (debts, capital, profitability, etc) and therefore they can alternate from one period to the other.

  • Statistics presenting the number of companies by default probability ranges
     

    The statistics is used to position your company from a probability of default measure standpoint, against all Romanian companies. This statistics indicate if your company is among the ones with a high default risk, or with low default risk, and also show the total number of companies in the same range of default risk with the company searched.

  • Market Value of the firm, as computed for the latest 4 years
     

    The Market Value for the latest 4 years indicate whether the company's market value is growing by improving its profitability and capitalizing them, or if the firm is on a descending trend, which means that its financial standing is eroding. The Market Value allows for the assessment of a company's "dimension", an important characteristic of a firm, when entering into contractual relations with it.

  • Statistics presenting the number of firms, grouped by Market Value range
     

    The statistics allows for including the company in a MV range, and its comparison with the total number of companies from that interval. At the same time, it offers a birds' eye watch over the dispersion of companies, according to their MV. The graph indicate whether the firm is among the large ones (very few in Romania's economy), or among the small ones (the most numerous).

 
Additionally, we recommend you the following reports, to gain an as complete as possible interpretation of the financial data of a company:
 
Financial Rating - indicates the global financial evaluation of the firm, based on its historic financial information
 
Trade Limits - indicates the recommended amounts, for which goods / services can be supplied to a company, based on term payment
 
Overdue Liabilities - the amounts due to the State Budgets, which were not paid in due terms
 

4. Methodological Considerations

 

The Probability of Default is determined, based on the financial information of companies, published by firms as of the end of each fiscal year. Figures have been computed for a number of between 600,000 and 700,000 companies, for each year from 2005 to 2012.

The forecast model takes into account a large number of indicators from the company's Balance Sheet and its Profit and Loss Statement. It has a statistically computed accuracy of around 90% of the default forecast,for a forecast period of maximum 1 year from the date of the financial statements.

While testing the model on Romanian companies, for the period covering 2005-2012, the actual forecast accuracy has been of 84.3%, and the "false-negative" type errors accounted for 5.7%.

According to Basel II and Basel III methodologies, the algorithms used by RisCo for computing the Probability of Default correspond to the methodology of determining an "unstressed probability of default".

The Market Value of the company is computed, based on the company's estimated market value of its shares, plus company's liabilities. Computation is done starting from the end of fiscal year financial results of the firm, adjusted by the relevant adjusted average multiples of similar companies in the same activity sector, listed on the capital markets. Moreover, the model is adjusted to reflect also the net financial results of the company (net profits), incorporated into a "discounted cash-flows" valuation model.

In building-up statistics, both for the Probability of Default, and for the Market Value, only commercial companies of the type Limited Liabilities (SRL) and Joint Stock (SA) have been considered. Statistics disregard companies of the type: Individual of Famity Enterprises (Intreprinderi Individuale or Intreprinderi Familiale, Persoane Fizice Autorizate PFA), Banks, Non-banking Financial Institutions (IFN), other co-operative institutions (Organizatii Cooperatiste de Credit, Cooperative agricole si mestesugaresti), Insurance companies and Insurance Brokers, Capital market and other type of Brokers, Funds and other type of companies, specifically regulated under the laws of the capital markets.

5. Limitations in liability and limitations in the use of this Report

 

This Report has a purely informative character and DOES NOT represent an advice, recommendation, offer of invitation to buy or subscribe to products and/or services offered by third parties, and cannot be the foundation of entering, avoiding or ceasing the performance of the provisions of any contract or other legal undertaking of any nature, and does not represent any guarantee for the minimization or elimination of any risk factors, associated with the activity of the user.

The information contained in this report have not been independently verified by us, and accordingly there is no express or implicit guarantee for the correctness, completeness, accuracy of the information and/or the opinions contained within this report, by way of consequence, using this report is on the sole risk of the user.

RisCo Servicii Financiare SRL nor any of its employees accept any liability as regards to:

- economic losses, including but not limited to, loss of revenues, profits, contracts, use, opportunity, business or anticipated savings,

- loss of goodwill, image, or reputation,

- loss or special or incidental damage, direct or indirect, suffered or realized in lieu to the use of this site and the reports offered herein.

6. How can you get the Companies Probability of Default and Market Value Report

 
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Raport Probabilitate si Insolventa de Piata