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.
NRating Altman Z-Score
Altman Z-Score, which involves complex calculations, is computed by Naker Rating K.K. It is essential to analyze both standalone and consolidated figures, as either may show a higher probability of bankruptcy.
Score Range
- Z > 2.99: Safe Zone (Low bankruptcy risk)
- 1.81 < Z < 2.99: Grey Zone (Moderate bankruptcy risk)
- Z < 1.81: Distress Zone (High bankruptcy risk)
Z-Score Formula
Z = X× (Working Capital / Total Assets) + X× (Retained Earnings / Total Assets) + X× (EBIT / Total Assets) + X× (Market Value of Equity / Total Liabilities) + X× (Sales / Total Assets)
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.