Provides greater accuracy in predicting which companies are most/least likely to default
Thomson Reuters, the world’s leading supplier of intelligent information for businesses and professionals, today announced that it has introduced the StarMine SmartRatios Credit Risk Model to assess the credit risk of publicly traded companies. The SmartRatios model is an intuitive and robust default prediction model that provides a clearer view of a firm’s credit condition and financial health by analyzing a wide array of accounting ratios that are predictive of credit risk and combining these with forward-looking analyst estimates. This builds on Thomson Reuters aims to help professional investment managers generate more profitable investment ideas and mitigate risks, giving them an edge over their peers.
Unlike other credit risk models that use accounting ratio analysis, the SmartRatios model incorporates information from forward-looking analyst estimates via StarMine’s proprietary SmartEstimate® rather than relying solely on backward-looking reported financials. The forward-looking SmartEstimates provide a considerable boost to the model’s predictive power and responsiveness, particularly during periods when economic conditions are changing rapidly.
Dr. George Bonne, director of quantitative research at Thomson Reuters, said: “It’s expected that one would want to use forward-looking information when assessing the financial health of a company. The shocking reality is that there is no other commercial credit risk model that does so in a systematic fashion. They all rely on backward-looking reported financials. It’s the traditional driving by looking in the rear-view mirror problem again, and investment managers cannot afford to be blind-sided by the failures of inefficient models. One of the key advantages of our SmartRatios model is that it not only uses the consensus forecast but also our industry leading SmartEstimate.”
The SmartRatios model groups various accounting ratios into five components: profitability, coverage, leverage, liquidity and growth, and provides 1-100 percentile scores on each component so that professionals can quickly understand where a company’s strengths and weaknesses lie. In addition to using the StarMine SmartEstimate, the model also makes use of industry-specific metrics for companies in the banking, insurance, utility, retail, airline and oil & gas industries. The model has already found numerous valuable use cases among financial professionals: as an equity alpha signal, for fixed income security selection, for predicting changes in agency ratings, and for assessment of counterparty or supplier credit risk.
The model produces daily updated estimates of the probability of default or bankruptcy within one year for over 35,000 companies globally, including financials. The default probabilities are also mapped to traditional letter ratings and ranked to produce 1-100 percentile scores (with 100 being comparable to an AAA rating). The StarMine SmartRatios model is provided as a daily data feed from Thomson Reuters, as well as through a range of its desktops, such as Thomson Reuters Eikon, Thomson ONE for Investment Management and the newly-released Datastream Professional.