Understanding your risk assessment with Risika
To help our users make secure and data-driven decisions, we have created this guide on how we assess the financial health of companies. Here, you can learn more about the Risika Score, the concept of creditworthiness, and how the two differ.
Overview
- What is the Risika Score
- Hvad er kreditværdighed
- Forstå forskellen mellem Risika scoren og Kreditværdighed
What is the Risika Score
The Risika Score is an advanced predictive model aimed at forecasting financial distress in a company. It is designed to provide a clear and objective picture of the risk associated with trading with a given partner.
What does the model capture?
- The model is trained to predict critical events such as bankruptcy, compulsory dissolution, and restructuring. However, it does not predict normal, non-hazardous closures such as mergers or voluntary liquidations, as these are not signs of financial instability.
How is it calculated? - The score combines 25 carefully selected data points. These consist of 8 fixed financial ratios (such as equity, solvency ratio, and liquidity ratios) and 17 adaptive features, which are selected via Machine Learning based on what best separates healthy companies from companies in financial distress.
The data foundation: - The models draw information from a wide range of sources, including accounting data, the company's age, address changes, changes in employee numbers, the industry's risk profile, and any bankruptcies within the company's network. Delays in submitting financial statements are also used as a strong risk signal.
An easily understandable 1-10 scale: - All this data is converted into a Probability of Default (PD) – the likelihood of a company going bankrupt within a 1-year period. This is translated into a score from 1 to 10.
- A score of 1 indicates a very high risk (historically, 84% of these end up going bankrupt).
- A score of 10 indicates a very low risk of bankruptcy (only 0.65%).
Adapted models:
To ensure the most accurate assessment, there are separate, tailored models for operating companies, holding companies, and sole proprietorships, respectively. A company automatically receives a new score when it becomes one year older, publishes a new financial statement, or if it changes its company form.
What is Creditworthiness?
(Note: While the attached document delves into the mechanics behind the Risika Score itself, it does not describe an isolated formula for creditworthiness beyond the score. The following is therefore a combination of the document's data and the general business definition).
The 8 fixed financial ratios included in Risika's model (including equity, long-term debt, and return on assets) are the foundation and absolutely essential for any classic credit assessment.
In a broader business sense, creditworthiness is an overall assessment of a company's ability and willingness to pay its bills on time. This is the assessment that forms the basis of whether you want to offer the customer to buy on invoice, and how large a credit limit (credit maximum) you want to make available.
The Difference Between the Risika Score and Creditworthiness
Although the two terms are often used in the same sentence, they describe two different steps in a credit process:
The Risika Score is the cause (fact)::
- It is the raw, statistical probability of the company experiencing financial distress within the next year. It is an objective mathematical measurement (1-10) based on historical data and the company's current situation.
Creditworthiness is the consequence (decision): - This is the final business assessment. A high Risika Score will usually result in high creditworthiness. However, the assessment of creditworthiness can also include your own internal policies – for example, that you do not grant credit to specific industries regardless of how good their Risika Score is, or that you set a fixed credit limit based on the size of the company.
**In short: **The Risika Score tells you the risk associated with the customer. Creditworthiness determines what you will do about that risk.