piraeus bank group


Enterprise Rating System: Separating wheat from chaff – increased percentage of underperformers versus medium performers

We updated our quantitative rating system for domestic enterprises – the Enterprise Rating System (ERS).

In 2017, in a sample of 10,269 enterprises, 97.2% were small and medium-sized enterprises (SMEs; turnover up to €50 mn).

Enterprises that outperformed in liquidity, profitability and solvency (outperformers), thus achieving the highest ERS rating (“a”), constituted 8.3% of the sample. This percentage is slightly higher than that in 2016 (7.9%).

Enterprises with good but less satisfactory performance (good performers) were rated “b” and constituted 35.3% of the sample. Enterprises that lagged significantly in performance (medium performers) were rated “c” and accounted for 40.1% – that is, the largest percentage – of the sample.

Finally, enterprises with serious problems (underperformers) were rated “d” and accounted for 16.3% of the sample. In comparison to 2016, the percentage of underperformers versus medium performers increased by about 1%.

Outperformers “a”

  • Overall, only 8.3% of the analysed enterprises were outperformers (“a”), with €11.1 bn in assets and €7.3 bn in equity value.
  • However, they managed to achieve profits before taxes amounting to €1.2 bn, accounting for 27.1% of the sample’s total profitability, with the EBITDA margin amounting, on average, to 25% and the return on equity to 18.5%.
  • 1.3% of outperformers were SMEs with positive EBITDA and losses before taxes.
  • At the same time, they took on the fewest liabilities (€3.9 bn) or 4.1% of the sample’s total liabilities.
  • They had a high degree of liquidity, with current assets covering their current liabilities by approximately 4.1 times. The coverage of large enterprises was lower (3.4 times).
  • They had low leverage as their liabilities amounted to only half of their equity.
  • The net debt of outperforming SMEs in relation to EBITDA was almost zero. For large enterprises, it was higher, but remained low (1.4 times).
  • Consequently, their debt servicing ability was high because EBITDA covered financial expenses by 22.7 times, whilst none of these enterprises had an interest coverage ratio less than 1.

Good performers “b”

  • Their total equity value was €23.6 bn, shared almost equally between SMEs and large enterprises.
  • The liabilities of good performers (“b”) were higher than those of outperformers (“a”) at €29.1 bn.
  • Their contribution was important in terms of turnover (€38.1 bn), EBITDA (€5 bn) and profits before taxes (€2.7 bn).
  • Their levels of operating profitability were more limited, but still satisfactory, with the EBITDA margin at 14.9% and return on equity at 12.9%.
  • 5.8% of SMEs and 3.3% of large enterprises had positive EBITDA and net losses before taxes.
  • Their level of liquidity was below that of outperformers (“a”), but still satisfactory because current assets were 2.6 times the current liabilities, while the coverage of large enterprises was lower at 2 times.
  • They had higher debt levels, as liabilities exceeded equity by 1.2 times and the average net debt was 3.5 times higher than EBITDA.
  • They were able to adequately manage their debt because EBITDA covered financial expenses by 13.3 times.
  • Only 0.4% of good performers had an interest coverage ratio less than 1, and they were mostly SMEs.

Medium performers “c”

  • Most enterprises were rated as medium performers and they had the highest aggregated asset value (€79.2 bn).
  • Medium performers took on the highest value of total liabilities (€49.9 bn) and financial expenses (€1.5 bn), and about two-thirds of these enterprises were large enterprises.
  • They recorded the highest turnover (€60.9 bn) in total, but only €1.4 bn in profits before taxes, most of which was reported by large enterprises.
  • They achieved low levels of efficiency and profitability, as the EBITDA margin was only 7.6% and return on equity was 5%. The equity of large enterprises performed better at 9.2%.
  • 14.7% of SMEs and 11.5% of large enterprises had positive EBITDA and net losses before taxes.
  • Their liquidity is more limited, with current assets covering current liabilities by 1.5 times for SMEs and by 1.2 times for large enterprises.
  • They had high net debt, which exceeded EBITDA by 13.8 times for SMEs and by 12.6 times for large enterprises.
  • Their debt servicing was low as EBITDA covered financial expenses, on average, by 4 times. The performance of large enterprises was better at 5.9 times.
  • 19.4% of SMEs and 5.3% of large enterprises had an interest coverage ratio below 1.

Underperformers “d”

  • SMEs had 64.1% of trapped assets (€7.1 bn vs €4 bn in large enterprises).
  • The negative total equity (€-33.1 mn) of underperformers (“d”) revealed their adverse financial conditions. Large enterprises, in part, counterbalanced losses with their total positive equity (€65.2 mn) versus the €-98.3 mn of SMEs.
  • The net debt was almost the same as liabilities, indicating limited cash buffers.
  • The liabilities (€7.3 bn) and financial expenses (€217 mn) of SMEs were, in total, twice those of large enterprises.
  • €8.1 bn in sales resulted in losses, even at the EBITDA level, amounting to €-324 mn, and expanded at the before taxes level to €-899 mn.
  • As they were basically loss-making enterprises, the average EBITDA margin was −8.7%. However, the average performance of large enterprises was only marginally negative (−0.7%).
  • The management of equity was inefficient, with a negative return on equity at −15.9%. The negative performance of large enterprises was limited to −11.9%.
  • 15% of SMEs and 41.7% of large enterprises had positive EBITDA and net losses before taxes.
  • They encountered obvious liquidity difficulties as their current liabilities exceeded current assets (current ratio: 0.7 points).
  • They were overleveraged enterprises with liabilities at 3.7 times the equity. The performance of large enterprises was even worse at 4.8 times the equity.
  • At the same time, net debt was 24.1 times EBITDA. The performance of large enterprises was slightly better (21.4 times EBITDA).
  • Almost all SMEs (81.4%) and two-thirds of large enterprises (66.7%) had an interest coverage ratio below 1.

The highest percentages of outperformers (“a”) among their companies were in the energy and mining and quarrying sectors, at 18.8% and 16.2%, respectively. Again, there were good performers in the energy sector, as more than half were rated “b” (51.5%). They were followed by manufacturers of equipment and machinery (46.2%) and basic metals and metal products (44%), respectively.
However, more than half of the agricultural (53.2%) and water supply (52.6%) companies had medium performance (“c”). More than a quarter (27.3%) of retailers underperformed and were rated “d”.