New Thomson Reuters’ model assesses corporate risk

Information provider Thomson Reuters has launched a service to assess the credit risk of publicly traded companies.

The StarMine SmartRatios Credit Risk Model is an “intuitive and robust default prediction model” that provides a clearer view of a firm’s credit condition and financial health by analyzing a wide array of accounting ratios that are predictive of credit risk, and combining these with forward-looking analyst estimates, the company said.

Unlike other credit risk models that use accounting ratio analysis, the SmartRatios model incorporates information from forward-looking analyst estimates via StarMine’s proprietary SmartEstimate, rather than relying solely on backward-looking reported financials.

That boosts the model’s predictive power and responsiveness, particularly during periods when economic conditions are changing rapidly, a statement said.

George Bonne, director of quantitative research at Thomson Reuters, said analysts should use forward-looking information when assessing the financial health of a company. “The shocking reality is that there is no other commercial credit risk model that does so in a systematic fashion. They all rely on backward-looking reported financials,” he said.

“It’s the traditional driving by looking in the rear-view mirror problem again, and investment managers cannot afford to be blind-sided by the failures of inefficient models. One of the key advantages of our SmartRatios model is that it not only uses the consensus forecast but also our industry leading SmartEstimate.”

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