NRating

NRating is a proprietary credit rating score developed by Naker Rating K.K.

It is a hybrid model that incorporates both quantitative and qualitative information to express the overall creditworthiness of a company. Unlike bankruptcy prediction models, NRating focuses more on reputation risk rather than on non-performing loan risk.

The score is centered around a median value of 3, with adjustments made based on factors emphasized by Naker Rating K.K. The following types of information, in particular, can significantly reduce the score:

Negative news that damages brand image or risks involving large-scale compensation claims
Mismatch between business size/type and registered address (e.g., a so-called large enterprise headquartered in a residential area)
Small capital companies funded by individual shareholders or underinvested foreign-owned firms
Damage to critical business assets or legal/regulatory constraints on operations

Scoring Scale

Score	Risk Level	Description
5	Very Low Risk	No concerns for partnership. Active business alliance encouraged.
4	Low Risk	Suitable for business relationship; potential for collaboration.
3	Moderate Risk	Trade possible but within recommended credit limit.
2	High Risk	Trade not recommended due to credit concerns. Monitor payment status.
1	Very High Risk	Avoid establishing business relationship.
NR	No Rating	Creditworthiness cannot be determined.

NRating Credit Limit

The credit limit is calculated based on the financial figures of the company under investigation. Naturally, the acceptable level of credit varies depending on the financial condition of the client, so the calculated credit limit serves as a benchmark to recognize when credit risk increases.

The total credit limit is calculated based on the financial statements without considering the number of trading partners. A separate per-transaction credit limit is calculated by assuming a reasonable number of counterparties based on capital size.

Calculation Logic

Total Credit Limit

a. Base Credit Limit (Cash Flow Based)
X% of cash and deposits are used as the base credit limit.

b. Adjustment for Receivables Risk
X% of receivables are included; X% are excluded to account for collection risk.

c. Adjustment for Payables
X% of accounts payable are subtracted from the credit limit.

d. Adjustment for Short-Term Debt
X% of short-term borrowings are subtracted.

e. Final Credit Limit Formula
Total Credit Limit = Base Limit + Receivables Adjustment – Payables Adjustment – Short-Term Debt Adjustment

Per-Transaction Credit Limit

Based on the total credit limit, the number of customers is estimated as follows:

Capital ≤ 10 million yen, Sales ≤ 100 million yen: Xcustomers
Capital ≤ 10 million yen, Sales > 100 million yen: Xcustomers
Capital > 10 million yen, Sales ≤ 100 million yen: Xcustomers
Capital > 10 million yen, Sales > 100 million yen: Xcustomers

The per-transaction limit is calculated by dividing the total credit limit by the estimated number of trading partners.

NRPD Score (NRating Probability of Default)

At Naker Rating K.K., the NRPD Score integrates the Altman Z-Score with a statistically estimated Probability of Default (PD) to provide a more intuitive and quantitative assessment of bankruptcy risk.
By combining both the Z-Score (financial soundness) and a calibrated probability model consistent with major risk gradation, the NRPD Score delivers a realistic view of a company’s credit risk profile.

(1) When full financial data are available

Calculation Logic

The Altman Z-Score (for listed manufacturing firms) or Z′-Score (for non-listed and non-manufacturing firms) is first computed.
The resulting Z-value is then converted into a 1-year probability of default (PD) using a logistic transformation.

Z-Score Equations

Listed (Manufacturing):
( Z = 1.2X₁ + 1.4X₂ + 3.3X₃ + 0.6X₄ + 1.0X₅ )
Unlisted (General):
( Z′ = 0.717X₁ + 0.847X₂ + 3.107X₃ + 0.420X₄ + 0.998X₅ )

Variable Definitions

Variable	Definition
X₁	Working Capital / Total Assets
X₂	Retained Earnings / Total Assets
X₃	EBIT (Operating Profit) / Total Assets
X₄	Market Capitalization / Total Liabilities (for listed firms)Equity / Total Liabilities (for unlisted firms)
X₅	Net Sales / Total Assets

Conversion to Probability of Default

[PD = \frac{1}{1 + e^{(a + bZ)}}]

The model parameters (a, b) are internally calibrated so that:

Z = 2.9 → PD ≈ 1% (Safe Zone)
Z = 1.23 → PD ≈ 20% (Distress threshold)
Z < 0.5 → PD ≈ 40–70% (High default risk)

This allows the Z-Score to be expressed as an intuitive probability between 0% and 100%.

(2) When some financial items are missing (Supplementary Model)

When certain items (e.g., EBIT or Sales) are undisclosed, Naker Rating applies a scenario-based estimation model that preserves analytical consistency with the Z′ framework.

Step 1 – Substitute estimation

If EBIT is unavailable: assume a reasonable EBIT margin (–5% to +10%) based on sector medians.
If Sales are unavailable: estimate asset turnover (X₅) from comparable industry data.
If retained earnings are missing: infer from capital components or accumulated surplus items.

Step 2 – Scenario analysis
Each assumption set produces a provisional Z′-Score and corresponding PD range (e.g., 30–55%),
converted via the same logistic mapping.

Step 3 – Confidence disclosure
When proxy values are used, the output is explicitly labelled Scenario-based with a confidence level indicator (High / Medium / Low).

(3) Interpretation of NRPD Scores

NRPD (1-year PD)	Risk Classification	Corresponding Z-Zone
0–2%	Low Risk (Safe Zone)	Z > 2.9
2–10%	Moderate Risk (Gray Zone)	1.23–2.9
10–30%	High Risk (Distress Zone)	Z < 1.23
30%+	Severe / Default Concern	Z < 1.0

The NRPD Score quantifies financial distress probability on a stand-alone basis.
Qualitative factors such as group support, guarantees, or extraordinary backing are separately reflected in the NRating (credit grade) for comprehensive assessment.

(4) Output Example (Z-Score with NRPD)

Z′-Score: 0.58 (Distress Zone)
NRPD Score: 46% (1-year probability of default, standalone basis)
The score represents a statistical measure of financial default risk based solely on quantitative data.
Group guarantees and parent-company support are not reflected in this value.

NRating Business Valuation

Using the Discounted Cash Flow (DCF) method, Naker Rating K.K. evaluates a company’s total value by converting its expected future cash flows into present value. This allows for a better understanding of a company’s true worth and supports more accurate decision-making.

Valuation Logic

Forecast Future Cash Flows
Estimate future cash flows based on historical financial data.
Determine Discount Rate (WACC)
The discount rate is typically the company’s weighted average cost of capital (WACC).
Discount Cash Flows to Present Value
Each future cash flow is discounted using the WACC to convert to present value.
Calculate Terminal Value
Estimate the value of perpetual cash flows beyond the forecast period using a terminal growth rate.
Sum Present Values
Add up discounted annual cash flows and terminal value to get enterprise value.
Calculate Equity Value
Subtract debt from the enterprise value to determine the company’s equity value.