77% of companies with “below industry average news sentiment” witnessed a deterioration in financials
FiND Credit Risk Early Warning System (EWS) captures company related red-flags through analysis of millions of data points and news. Unstructured data sets such as “news” are an important piece of information that can be consumed in the risk assessment of corporate borrowers.
Our hypothesis is that the news sentiment acts as a lead indicator to the deterioration in the company’s financial performance. To test this hypothesis, we back-tested news data of 2,250+ companies for the year 2016 on the following business rule:
Company’s news sentiment average stays below the industry average for all 4-quarters in CY16
We identified 924 such companies. Then, we checked if there is any deterioration in the quarterly financial performance (measured by the score of financial business rules) for these companies in the next 4-quarters (CY17).
For 77% of companies (714/924), we found that A. The number of red flags on quarterly financials outpaced the number of green flags in CY17 and B. The net score of red flags was lower than minus 10 for all 4-quarters in CY17.
We have highlighted 3 such companies whose news sentiment remained below the industry average for all 4-quarters in CY16.
We have also listed quarterly result charts for these 3 companies which highlight a deterioration in their financial performance in the subsequent quarters.
Publically available data from Employees’ Provident Fund Organization (EPFO) is an important piece of information that can be consumed in risk assessment of corporate borrowers. In our view, deep-dive analytics on EPFO data can offer unique insights into the company’s functioning.
Through analysis of EPFO data, the banks can find out whether the companies in their loan portfolio are depositing employees’ provident fund (PF) on time or not; and whether there is any significant drop in the PF amount deposited by the company. At the same time, lenders can also identify companies which are downsizing the workforce.
FiND Credit Risk Early Warning System (EWS) consists of 25+ business rules that analyze the EPFO data for the companies every month. One of the key business rules is a delay in PF payment for a given month. In our view, a delay in PF payment may imply liquidity crunch for the company and hence it is a red flag for the banks.
Our hypothesis is that red flags related to PF payment can act as a leading indicator to the deterioration in the company’s financial performance. To test this hypothesis, we back-tested our engine on EPFO data for three months (Jan-17, Feb-17, and Mar-17) on the below-mentioned business rule:
Delay in monthly payment of PF by more than 10 days for more than 50 employees
From our EPFO data universe of 1,250+ companies, FiND EWS identified 35 companies who have delayed PF payment for all 3 months.
Then, we checked if there is any deterioration in the financial performance (captured by FiND Financial Risk score) for these companies post-March 2017 quarter.
We found that: 86% of companies (30/35) witnessed a deterioration in Financial Risk score in the subsequent quarters.
We highlight 10 such companies below:
[Image 1: Financial Risk Score for 10 Companies with PF red flags] Read the rest of this entry »
Corporate default or bankruptcy do not happen overnight. There is a sequence of events such as layoffs, legal/ regulatory issues and management change leading to default or bankruptcy.
In our view, unstructured data sets such as news is an important piece of information that can detect such a sequence of events prior to default.
Our hypothesis is that deep-dive analytics on news data can capture the pre-default behavior of corporates. At the same time, it can also help banks to identify distress corporate borrowers ahead of time.
To test our hypothesis, we analyzed news data for 12 US-based oil and gas exploration & production companies which went bankrupt in the past 2-years.
Here, we present one such case of SandRidge Energy Inc which filed for bankruptcy protection in May 2016. Read the rest of this entry »
Promoter ownership data is an important piece of information that can be consumed in risk assessment of corporate borrowers. This is because steep fall in promoter ownership could mean low confidence of promoters in their own company. Moreover, promoter equity dilution may also invite a change in management.
Our hypothesis is that promoter ownership related red flags such as a significant drop in promoter shareholding can act as a leading indicator to the deterioration in the company’s financial performance.
To test this hypothesis, we back-tested business rule output derived from FiND Credit Risk Early Warning System for all listed companies. Our back-testing has shown 298 promoter ownership related red flags for 232 companies for the March 2016 quarter.
As a next step, we have checked if there is any deterioration in the company’s performance captured by our Financial Risk score for these 232 companies over the last 2 years.
We found that: 85% of companies witnessed a deterioration in Financial Risk score in the subsequent quarters.