In the next in my series of pointers for the ACCA AFM March 2024 exam, sources of finance is tested in virtually every exam to some extent.

The examiners like to test the criteria used by the credit rating agencies to rate a company on a regular basis from this part of this syllabus.

This is a key point summary of what you need to know:

Industry Risk

✅Is it expanding or contracting?

✅Essential or non-essential products/services.

✅The level of operational gearing (committed fixed costs).

✅Regulatory issues (Eg Banking Industry).

Earnings Protection

✅The range of products/services being sold by the company.

✅Profit margins.

✅Level of competition.

Financial Flexibility

✅Level of current debt within the company.

✅Date of maturity.

✅Other financial commitments

Company Management

✅Track record of success

✅Level of relevant experience.

✅Length of the contracts.

✅Relevant professional qualifications

The credit rating is important as in ACCA AFM we need this to find the credit risk premium measured in basis points.This then leads to ascertaining the YTM, bond value and post tax cost of debt.

Companies should take action as best they can to ensure they keep the good rating they have or improve from a poor position.

(BTW – the picture below is my current credit rating/score and the change in the last month. Come on, I should practice what I preach ! 😀😀😀).