Default and Bankruptcy risk models

Valuatum credit risk solutions include built-in payment default and bankruptcy risk models that use financial statements data to forecast default probabilities. The statistical modelling is based on the key figures calculated from the financial statement data.

 

Key Features of Default and Bankruptcy risk models

Single variable models

  • The picture on the right illustrates the connection between profitability (ROA %) and default risk - for example, as the picture shows, bankruptcy or default risks of companies with positive ROA % stay rather low, but right below the zero, the risk function gets steeper.
  • Risk estimations are based on Finnish default and bankruptcy data and financial statements data of nearly 200 000 companies.
  • Companies are grouped to large enough groups to make the risk estimates statistically significant.
  • However, like the two variable model below strongly shows, the one variable model gives only a limited view on bankcruptcy risk, and that is why Valuatum system also uses models with two or more variables.

 

 default risk

Multiple variable models

  • Multiple variable model gives more accurate bankruptcy and payment default risk estimations than single variable models
  • Any key figures and ratios can be used in the model
  • Development of the risk of the examined company can also be illustrated in the graph
  • For example, (see the graph on the right), bankruptcy risk of companies with the same profitabilty (ROA %) level can actually vary a lot depending on their solvency (Equity ratio), and even companies with poor profitability can have low bankcruptcy risk if they have high solvency.

 two variable risk function

Risk by components

  • Valuatum system estimates overall bankcruptcy and default risks using several selected components to ensure best possible accuracy
  • Overall statistical backruptcy risk can be divided to components
  • Easy to interpret graph illustrates which factors have an influence on the bankruptcy risk of the company, and shows how strong the influence is compared to other factors

 

 bankruptcy risk components

Industry risk

  • The system also calculates the bankruptcy risk estimates for industries based on Finnish default and bankruptcy data and financial statements data
  • The industry risk level can be taken into account when estimating the bankruptcy risk of a certain company.
  industry risk table

 

Automated estimation of bankruptcy risk

  • Bankruptcy risk estimation of companies is automated in the Valuatum Platform. Read more about the different methods used for the estimation in this document Automated estimation of bankruptcy risk.