Among a CFO’s typical target KPIs is improving the company’s credit rating, as it directly impacts the organization’s value through its effect on the Cost of Debt (CoD) and ultimately the Weighted Average Cost of Capital (WACC).
The CoD can be estimated using a modified version of the CAPM model. To do this, we need to define the beta of the company’s debt (in more detail), which often requires knowing its credit rating.
Credit ratings for listed companies are generally accessible. But how do we estimate the rating for a private business, especially when we don’t use a dedicated rating agency or when such data isn’t provided by the servicing bank?
In such cases, financial ratio benchmarks (see table below) can be very useful. These benchmarks reflect the typical levels of operating and financial risk indicators corresponding to different credit rating tiers. We can compare these to the metrics of the business under evaluation.
📊 Updated Financial Ratios by Credit Rating (Estimates, 2023–2024)
Table adapted from:
Corporate Valuation: Theory, Evidence and Practice
Mark E. Zmijewski & Robert W. Holthausen, 2nd Edition
Updated using ChatGPT.
P.S.
The approach described above works in many practical cases. However, for a more qualified estimation, companies sometimes build formal rating models. This requires advanced statistical analysis — typically using regression to determine which financial indicators are significant predictors of rating levels, their statistical significance (p-values), and standard errors.