Assess the business risk

The magnitude of the business volume transacted has an impact on the company risk. Larger companies are perceived to be less risky than smaller ones.

The predictability of the return also influences the perception of risk. The more predictable the return, the lower the assumed risk.

Also, a high dependence of the company on its management, on its top executives and on a few key employees leads to a higher risk perception.

The less diversified the company is in the market, the higher the risk.

Opinions obviously differ on the question of internationalization of sales. While some positively acknowledge an international business in their risk assessment, others penalize globally networked dependencies with a higher risk allocation. The same applies to involvement in globally networked supply chains.

Dependence on certain suppliers naturally increases risk.

If a company generates better earnings than the industry average, it receives a risk discount, otherwise a risk premium. Similarly, how cyclical the company’s business is plays a role. Most evaluators add value if there is no cyclicality.

Companies with a low dependence on technical progress are assumed to have a lower risk than companies with a high dependence on technical progress.

Last but not least, entrepreneurial personality is a credit rating driver. Charismatic entrepreneurial personalities with strategic vision who maintain a participative management style contribute to a lower risk assessment.

Example: If the company in the previous example is twice as risky as the market average, the company risk is 9.8%.

The discount rate is the sum of the base rate and the company risk.

Example: The interest rate to be applied for discounting future earnings is 0.1%+9.8% = 9.9% for the company from the previous examples.

The adjusted future earnings are then discounted using the discount rate determined.

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