How to Identify a Good business from a Credit Rating perspective

In the webinar “How to Identify a Good business from a Credit Rating perspective”, broadcast on March 25, 2025, on “Tài chính Kinh doanh”, a discussion platform for business, finance, and investments, Mr. Nguy?n Quang Thuân, Chairman of FiinGroup and FiinRatings, shared in-depth insights on applying credit ratings in investment practices.

In the webinar “How to Identify a Good business from a Credit Rating perspective”, broadcast on March 25, 2025, on “Tài chính Kinh doanh”, a discussion platform for business, finance, and investments, Mr. Nguyen Quang Thuan, Chairman of FiinGroup and FiinRatings, shared in-depth insights on applying credit ratings in investment practices. He also clarified key aspects of FiinRatings' credit rating assessments and how to utilize ratings to optimize investment portfolios. 

Profit always comes with Risk – A fundamental market principle 

This principle is not a new concept for the viewers. Mr. Thuan had illustrated various asset types in Vietnam, from bank deposits and government bonds to corporate bonds, blue-chip stocks, and even small-cap (penny stocks), where higher returns generally come with higher risk. 

However, the most significant risk investors should watch out for comes from businesses facing financial distress, struggling to meet debt obligations, or experiencing severe financial imbalances. This is particularly visible in the corporate bond market, where some bonds are trading with yields-to-maturity (YTM) exceeding 50%, even reaching 90%/year in some cases—a trend notably seen among private real estate firms undergoing debt restructuring or delaying interest payments. 

5 key signs of Financially Unstable Businesses 

Investors can proactively identify financially risky businesses by paying attention to these five crucial indicators: 

High Financial Leverage (Debt-to-Equity Ratio) 

A high debt-to-equity ratio is an early warning sign. When a company’s net debt significantly surpasses the industry average and its ability to pay interest and principal weakens, the risk of insolvency rises. However, industry characteristics and project cycles must also be considered—high leverage is not always a bad sign (e.g., infrastructure or energy projects). 

Low-Quality Profits  

If a company’s revenue is growing but its profits come mainly from non-core financial activities rather than its primary business operations, this raises concerns about sustainability. 

Weak Liquidity 

Companies heavily reliant on short-term borrowing or lacking sufficient cash flow to meet financial obligations are at risk. Investors should assess actual liquidity quality and projected cash flow, rather than just looking at cash balances in financial reports. 

Frequent Capital Increases and Governance Changes 

Businesses that continuously raise capital but invest in related parties or show governance red flags—such as frequent CFO changes, delayed tax or social insurance payments—may be in financial distress. 

Other than investing in businesses, mutual funds are also a promising option, especially for individual investors looking to access the market through professionally managed portfolios. However, rather than focusing solely on NAV growth, investors should evaluate the asset allocation strategy, stock selection capabilities, market timing effectiveness, and risk management approach of the fund. Choosing the right fund should be based on each investor’s investment goals and risk appetite. 

Credit Ratings – A quantitative risk management tool 

Credit ratings assess a company's or a debt instrument's ability to meet financial obligations, providing investors with a quantifiable measure of risk. 

Unlike audit reports, which mainly reflect past financial performance, credit ratings serve as a forward-looking tool, offering a comprehensive view of a company’s financial strength and debt repayment capacity. 

FiinRatings' data from 2021–2023 shows “significant events” surged among companies rated below investment grade (BB or lower). For example, firms rated CCC had a 41.9% default rate, whereas investment-grade companies (BBB and above) had minimal risk. 

This explains why corporate bond yields are directly proportional to the issuer's risk level—financially weaker companies with lower credit ratings must offer higher yields to attract investors willing to take on more risk. 

Bond Valuation – How to Determine if a Bond is Overpriced or Undervalued? 

A key discussion in the webinar was bond valuation, specifically how to compare risk and return. Investors should compare bond yields with bank deposit rates or other benchmark interest rates to determine the risk premium. 

If the risk premium does not adequately compensate for the actual risk, the bond is overpriced and should be avoided. If the risk premium is sufficiently high, the bond may present a good investment opportunity. 

FiinPro-X Platform provides comprehensive data on bond yields (YTM), credit history, and financial performance, helping investors make informed decisions. 

Credit ratings help investors see, quantify, and manage risk, ultimately leading to better investment decisions. By leveraging credit ratings, investors can identify strong businesses, classify investment opportunities, and align their portfolios with their risk tolerance and financial objectives. 

🔗 Watch the full webinar here: THIS LINK

_____________________________________________

About FiinRatings 
FiinRatings, a member of FiinGroup and technical partner of S&P Global Ratings, is a licensed credit rating agency under Vietnam’s Ministry of Finance. Our services include credit ratings, green bond verification, and independent evaluations (Second Party Opinion - SPO), catering to issuers, lenders, and investors across diverse sectors in Vietnam. 

FiinRatings’ SPO services provide independent evaluations of financial instruments, policy frameworks, or transactions aligned with principles set by global institutions like the International Capital Market Association (ICMA) and the Climate Bonds Initiative (CBI). Notably, FiinRatings is the first approved verifier for CBI Climate Bond Standards in Vietnam. 

« Go Back