High-risk companies perform better across EMEA

Moody’s Investors Service released its annual study comparing median financial ratios by rating category across non-financial industries in Europe, the Middle East and Africa (EMEA). As expected, industries that are riskier and show higher revenue volatility continue to post stronger-than-average metrics at a given rating category.

At the Baa level, the Moody’s report shows that industries with consistently better-than-average metrics include Metals & Mining, Oil & Gas, and Healthcare & Pharmaceuticals. Industries with consistently weaker-than-average metrics for Baa issuers include Aerospace & Defence, Services, and Retail & Distribution.

“The evidence suggests that more intrinsically risky industries are required to achieve better credit ratios to obtain a given rating,” said Moody’s Jennifer Tennant, who wrote the report. “Put simply, those industries with more volatile revenues tend to be the same as those with otherwise better credit metrics, a finding consistent with previous research.”

The study looks at standard measures of coverage, leverage, cash flow-to-debt, liquidity, asset returns, profit margins, and revenue stability. These financial ratios provide a good foundation for comparative analysis across regions and industries.

Of the eleven metrics explored, only one, revenue volatility, showed a weak relationship with ratings — not consistently strengthening with each higher rating category. Revenue volatility does not strictly decrease as ratings improve among the speculative grades and is greater for Aaa rated issues compared with Aa, although this could be a function of the small Aaa sample size.

Moody’s emphasises that the study uses standard ratios to explore the quantitative content of ratings by industry and does not describe Moody’s rating process or the particular ratios favoured in rating committees.

“Ratio analysis is but one part of Moody’s analytical process; qualitative and forward-looking considerations are also important,” said Tennant. “As a result, a strictly increasing or strictly decreasing relationship between ratings and any single ratio should not generally be expected.”