One of the best tools to assess a company’s stocks is the Fitch rating scale. This scale takes a lot of parameters into consideration, and then lays down a rating of the creditworthiness of a business.
The Fitch rating scale is a mode of determining the credit rating of a company, based on the criteria and the methods adopted by the Fitch Group’s risk management firm, known as Fitch Ratings, Ltd. This rating scale is accepted around the United States, and it states the facts of an organization’s financial transactions, and projects their future dealings.
Its headquarters are based in London and New York, and it came into existence in the year 1913, eventually becoming a well-known player in the international credit rating scene. In 1975, the United States Securities and Exchange Commission designated 3 companies into the Nationally Recognized Statistical Rating Organization (NRSRO), along with Moody’s and Standard & Poor’s. The Fitch scale for rating has gone from strength to strength since then.
Fitch Credit Rating Scale
Like individuals, companies too require credit facilities from time to time, and there have to be some methods of determining the credibility of a business that wants to borrow some assets. This is where the importance of the Fitch scale comes in; moreover, this rating scale also outlines the projected forecast of the bonds and stocks of the company, based solely on their creditworthiness. The Fitch bond rating system is a widely accepted indicator of the financial health of any business.
Fitch ratings are assigned as alphabets, and this method is being used since 1924. Here you can see the most common ratings possible in the Fitch rating scale, and what they signify.
|AAA||The best possible rating for the most reliable and creditworthy companies.|
|AA||Not the best yet, but these companies are certainly getting there.|
|A||Stable companies, but they may get affected by some serious economic distortions.|
|BBB||These are average companies that are doing alright at the moment, but are not going to grow much in the future.|
|BB||These companies can react very quickly to changes in the economy, so one must be wary.|
|B||The condition of this company keeps varying from time to time, and they represent a fairly high risk.|
|CCC||These companies are just about sustaining themselves in the present economic environment, but a slight change can cause them some serious problems almost immediately.|
|CC||Very vulnerable companies, and their bonds represent a high level of speculation, not to mention a high degree of risk.|
|C||These companies are almost reaching bankruptcy, and are paying their arrears merely as an obligation at the moment.|
|D||These companies have a long history of defaulting, and they are very likely to do so in the future as well.|
|NR||These companies are not rated publicly.|
The Fitch rating scale is not only important for people who the company approaches for credit, it is also important for speculators and players of the stock market. Before an individual or a financial institution buys stocks or bonds of a company, they must assess its financial state and its financial history. This is where the Fitch ratings come into the picture, and they offer a structured and accurate assessment of the organization’s financial health.
Only the companies that come under the ratings AAA, AA, A and BBB are worth investing in, according to industry experts. The remaining grades represent no value, and also carry a high amount of risk, so one should stay away from them till they sort out their financial standing. These bonds are also known as ‘Junk Bonds’, and even speculators should refrain from buying the bonds of such companies. These ratings are also known as long-term credit ratings by Fitch.
The Fitch scale also has a system for measuring the short-term credit ratings of an organization, and these ratings help determine the ability of the business to repay their loans in the short term. Here are the sample grades for this purpose.
|F1+||The company will definitely meet all its financial obligations.|
|F1||The company is very likely to meet all its financial obligations.|
|F2||The company is satisfactorily equipped to meet its financial obligations.|
|F3||The company can meet its financial obligations, unless an unexpected meltdown or economic downturn occurs.|
|B||The company is doing alright, but it may struggle to meet all of its financial obligations in their entirety.|
|C||The chances of default are very high, unless there is a drastic upsurge in the fortunes and the finances of the company.|
|D||The company has a bad track record of repayment, and has already defaulted on several of its financial obligations.|
The Fitch rating scale is a very useful instrument for the functioning of the economy of a country, and particularly for its financial markets. The standardization and structure granted by this scale has proved very handy indeed, and will continue to do so.