The value of this solvency rating is an indication of the ability of the company to meet its long-term payment commitments (liabilities) from a dynamic point of view. It is an important indicator by the fact that an insolvent company is forced to stop operating and is liquidated in order to be able to face this financial obligations. Gradement uses for the calculation of this rating the best existing model of prediction of insolvency based on a dynamic analysis of the activity of the company.
The following table can serve as reference for the use of this rating%colon;
|Rating value range||Interpretation|
|0.0 - 2.5||Company with a strong tendency towards insolvency|
|2.5 - 5.0||Company with a tendency towards insolvency|
|5.0 - 8.0||Company with low probability of insolvency|
|8.0 - 10||Company with zero probability of insolvency|
Do not confuse the concepts of solvency and liquidity. Liquidity is a property of the assets of the company that indicates its ease of conversion into money without losing significant value in the sale. Solvency, which is what this rating calculates, is a measure of the company's ability to cope with its long-term debt. Therefore, there may be non-solvent companies with liquid assets and solvent companies with non-liquid assets. The solvency model that employs Gradement uses liquidity but onlt as one of the internal factors used to predict insolvency from the static point of view.
The usual method of solvency analysis, called the patrimonialist model, used by the majority of analysts, is a model based on a relatively simplistic comparison between the current assets and liabilities of the company (so called the acid test). This model considers the company to be solvent whenever it has enough assets to pay all its liabilities. We consider this model, traditionally employed by many analysts, to be relatively simplistic in the sense that the final objective of every solvency analysis should be to establish if the company can remain in the market and can continue operating under the same current conditions. Crearly this solvency objective can hardly be reached if, in order to remain solvent, the company has to sell its assets.
To calculate this rating Gradement uses a much more sophisticated model based on:
The dynamic solvency rating is the one that captures the tendency to insolvency of the company by analyzing if the funds generated in the corresponding accounting period meet all the liabilities payable during that period (point 2).