Overview
1. Risika Score
- What is the Risika score?
- Why do we use the Risika score?
- How is the score calculated?
- How are companies without financial reporting obligations or holding companies assessed?
- How accurate is the assessment?
- Why use a credit limit?
- How is the recommended amount calculated?
- How are holding companies assessed?
- Is there an absolute upper limit?
- Credit days
- Related bankruptcies
- Key figures and performance
- The model for Sole Proprietorships
- Ownership: Legal vs. Beneficial owner
- Auditor's report types
- Calculation of employees and company size
- Financial ratios
- Understanding the financial ratios
Risika Score
What is the Risika score?
The Risika Score is a predictive model designed to forecast financial distress in companies. The model calculates the probability of a company going bankrupt within a 1-year period. To make this assessment easy for you as a user to decode, the percentage Probability of Default is translated into an intuitive and easy-to-understand score from 1 to 10. This score is further supported by classic traffic light colors, providing a lightning-fast and clear overview of the company's health.
Why do we use the Risika score?
The purpose of using this model is to capture a broader spectrum of financial instability, which, in addition to actual bankruptcies, also includes compulsory dissolutions and restructurings. However, it is important to distinguish: the model is smart enough to tell the difference between real financial distress and completely normal business closures. A voluntary liquidation or a merger is not perceived as a danger signal and therefore does not negatively affect a company's assessment.
How is the score calculated?
To ensure both an accurate and understandable assessment, the Risika Score is formed from 25 carefully selected data points. It consists of 8 fixed financial ratios—such as equity and return on assets—which always serve as a foundation in the model. Additionally, 17 adaptive features are used, which are continuously selected via Machine Learning simply because these are the data points currently best at separating healthy companies from those in trouble. The data basis is continuously retrieved from official registries such as the CVR and covers, among other things, accounting data, company age, industry-specific patterns, network bankruptcies, and strong risk signals like delays in filing financial statements. Furthermore, the score is dynamic and updates automatically when, for example, the company turns a year older, publishes a new financial report, or changes its corporate form from ApS to A/S.
Companies without a score
How are companies without financial reporting obligations or holding companies assessed?
To ensure a fair and accurate assessment for everyone, companies are not measured by a single generic model, but rather by three specially adapted versions. Operating companies are assessed using a very detailed model involving over 80 accounting variables, employee development, and much more. Holding companies have their very own model to avoid being "punished" in the assessment for naturally lacking elements like revenue or inventory. Finally, there are sole proprietorships. Since they have no financial reporting obligations, they cannot receive the normal 1-10 score. Instead, they are assessed based on age, industry, size, employee changes, and any related bankruptcies, receiving a clear risk assessment in the form of: High, Medium, or Low.
How accurate is the assessment?
The model's high precision is solidly documented through 8 years of historical data across all Danish A/S and ApS companies. The history shows a completely unique and monotonically decreasing curve without exceptions. Specifically, this means that companies with the lowest score (1) have a real bankruptcy rate of a full 84%, whereas companies with the highest score (10) have a vanishingly small bankruptcy rate of just 0.65%. To ensure the model remains sharp and reflects the current market reality, all three models are retrained once a year.
Understanding credit limits
Credit limit is a recommended maximum credit amount, indicating the specific amount Risika recommends that an individual supplier grant a given customer in ongoing, unsecured credit.
Why use a credit limit?
The most risk-free option for you as a company would, of course, always be for the customer to pay the full amount before delivery. However, the customer will usually resist this, as it shifts the entire risk of the transaction onto them. The solution is often to offer open credit, where you deliver the product before the purchase price is paid. This is very widespread—for example, in industry, where a wholesaler continuously delivers materials up to a fixed agreed credit ceiling. However, open credit is also the payment term representing the absolute greatest credit risk for you as a supplier. Precisely for this reason, it is crucial to have a well-defined, recommended credit limit to rely on.
How is the recommended amount calculated?
The size of the credit limit primarily depends on two factors: the company's Risika Score and the size of its equity. Since equity plays a large role in overall robustness, you may well encounter cases where a company with a Risika Score of 5 is recommended a higher credit limit than a company with a score of 7, simply because the former has significantly stronger capital behind it.
How are holding companies assessed?
When it comes to holding companies, the recommendation still depends on the Risika Score and equity, but the calculation dives a level deeper. To provide an accurate picture, specific account is taken of the company's equity investments, minority interests, intangible assets, cash and cash equivalents, and any receivables from affiliated companies.
Is there an absolute upper limit?
Yes, regardless of how large and solid a company is, Risika operates with conservative principles and fixed ceilings. A general credit limit of more than DKK 25 million is never recommended. Specifically for holding companies, a stricter limit applies, where a credit limit of more than DKK 15 million is never recommended.
Credit days
Credit days refer to the time period a customer is given to pay their invoice. This is a crucial parameter as it reflects how much working capital you as a company are willing to tie up in your receivables to generate sales. The specific number of assigned credit days is calculated based on a combination of the customer's Risika Score and the size of their equity. To limit risk, Risika's fixed recommendation is that one should never grant more than 90 days of credit.
Related bankruptcies
An important red flag in a credit assessment is related bankruptcies. This term covers situations where a member of a company's executive board, board of directors, or a beneficial owner has been involved in another company that has gone bankrupt or into compulsory dissolution. To be defined as a related bankruptcy, the person must have been active in the distressed company up to three months before the bankruptcy decree was issued.
Key figures and performance
To provide a lightning-fast and accurate insight into a company's financial strength, we highlight selected key figures such as solvency ratio, liquidity ratio, and return on assets. To assess whether these figures are good or bad, we measure the company's "performance." This is done by comparing the individual key figure with all other companies within the same industry and dividing them into fractiles:
80% - 100% = Very strong
60% - 80% = Strong
40% - 60% = Medium
20% - 40% = Weak
0% - 20% = Very weak
The model for Sole Proprietorships
A sole proprietorship differs significantly from a corporation. It has only one owner who is personally liable with their entire fortune, and it can be started without any capital injection. Additionally, there are neither auditing requirements nor an obligation to submit an annual report to the Danish Business Authority—the owner simply needs to keep records according to the law and submit tax accounts. Due to this lack of public accounting data, Risika uses a specially developed model for this company type. Instead of a 1-10 score, sole proprietorships are divided into low, medium, or high risk based on parameters such as age, size, industry, changes in employment, and any related bankruptcies.
Ownership: Legal vs. Beneficial owner
It is important to distinguish between two types of ownership. A legal owner can be either a physical person or another company that directly owns a minimum of 5% of the company. A beneficial owner, on the other hand, will always be a physical person who ultimately (directly or indirectly) owns or controls a sufficiently large share of the company—which as a rule is defined as a minimum of 25% ownership or control.
Auditor's report types
When an annual report is published, it may be accompanied by an auditor's report indicating the degree of assurance and control:
- Other reports (No assurance): The auditor has merely assisted with the preparation of the accounts or performed specifically agreed-upon procedures without performing actual control.
- Review (Limited assurance): The auditor has performed overall analyses, inquiries, and assessed risks, but without going into depth.
- Extended review (Limited assurance): The same actions as in a review, but supplemented by obtaining information from, for example, banks, the land registry, and the tax authorities (SKAT).
- Audit (High assurance): The auditor has reviewed the accounts in detail and performed physical control, recalculations, voucher sampling, and obtained confirmations from third parties.
Calculation of employees and company size
When looking at the number of employees, there is a difference between the actual number of people and full-time equivalents (FTE). One FTE corresponds to one full-time employee (1,924 hours per year). The average number of employees in the company can often be calculated precisely by looking at the total ATP contributions and dividing by the standard rate for a full-time employee (DKK 3,408).
These figures also help define the company size itself (cf. the Danish Financial Statements Act), where, for example, small companies are defined as having up to 50 full-time employees, and medium-sized up to 250.
Number of employees: Is the number of staff members.
Number of FTEs: One FTE corresponds to 1,924 hours per year. This means one full-time employee equals 1 FTE.
Average number of employees: The figure is calculated by looking at the company's total payments to ATP and dividing the figure by 3,408, which is a standard ATP rate for a full-time employee per year.
Danish Financial Statements Act: Cf. § 7, subsections 1 and 2 of the Financial Statements Act, small companies are defined as having up to 50 full-time employees*, a balance sheet total of up to DKK 44 million, and a net turnover of up to DKK 89 million, while medium-sized companies can have up to 250 full-time employees, a balance sheet total of DKK 156 million, and a net turnover of DKK 313 million. *Full-time employees: An average number of full-time employees during the financial year.
Category 0 - 9 = Micro enterprise
Category 0 - 49 = Small enterprise
Category 50 - 199 = Medium-sized enterprise
Category 200+ = Large enterprise (from 250 employees cf. the Financial Statements Act)
Financial ratios
Financial Ratios: A financial ratio, a financial rate, or an accounting ratio are all expressions of a reciprocal relationship between two selected numerical values taken from a given company's financial statements. Within the world of accounting, there is a significant selection of ratios used in the attempt to evaluate companies' financial situations.
Understanding the Financial Ratios
A financial ratio is an expression of the relationship between two selected values in a set of accounts. They are primarily used to assess and evaluate a company's health. They are typically divided into three main categories:
- Profitability ratios (e.g., ROE, ROA, Profit Margin): Show the company's ability to generate earnings from operations in relation to its turnover, assets, and equity.
- Liquidity ratios (e.g., Current Ratio, Asset Turnover): Show how proficient the company is at paying its short-term debt without having to take out new loans. It is an expression of short-term survival capability.
- Solvency ratios and gearing (e.g., Solvency Ratio, Debt-to-Equity): Shed light on how much of the company's capital is debt-financed. This is central to assessing the company's ability to withstand adversity and repay its long-term financial obligations.
Profitability ratios
Profitability ratios are a series of economic ratios used to provide insight into a company's ability to generate earnings relative to other economic items of the company, including relative to revenue, operating costs, balance sheet assets, and equity.