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Enterprise Rating System: Update of the rating system for small and medium-sized enterprises

After 8 years of recession and stagnation, which were marked by the dramatic deleveraging of the Greek economy, Greek banks - having already been capitalised three times– are again in a position to restart the substantial financing of the Greek economy. Yet, the legacy of the economic crisis on the Greek banking system indicates that this new effort of financing Greek enterprises will be a very selective and gradual process. In that respect, a question posed repeatedly not only in Greece but also by foreign analysts and investors is whether there are creditworthy and dynamic Greek enterprises that worth being financed which at the same time meet the strict lending criteria adopted by all banks in the Eurozone. 

The answer to this question lies in Small and Medium-sized entrepreneurship, as this is believed to be the most dynamic part of the Greek entrepreneurship, with a high degree of dependence on domestic sources of financing.

The implementation of the four-grade rating system for enterprises – Enterprise Rating System (ERS) – to a sample of 7,896 Small and Medium-sized Enterprises revealed that 8.6% of the examined SMEs have recorded outstanding performance in liquidity, profitability and solvency, thus achieving the highest rating. Accordingly, 35.7% of the examined SMEs belong to the next rating with a positive but less satisfactory performance. 40.4% of the SMEs were classified in the third rating, with a performance that falls behind significantly, while 15.4% of the sample was classified in the last rating, which indicates enterprises facing serious problems..

Profile of the average SME per final ERS rating, 2015:

Outperformer “a”

  • High levels of efficiency with the EBITDA margin amounting to 24% and the return on equity to 19.3% on average
  • None of the outperformers has interest coverage ratio less than 1
  • Only 0.9% of them have positive EBITDA and net losses before taxes
  • High liquidity, with current assets covering their current liabilities by approximately 3.9 times
  • Low levels of leverage, since their debt amounts to only half of their equity
  • High level of debt servicing, since EBITDA covers financial expenses by 21.4 times

Good performer “b”

  • More conservative, but satisfactory level of operating profitability, with EBITDA margin at 15.4%
  • Profitable efficiency of equity, with the return on equity at 13%
  • Only 0.7% of good performers have an interest coverage ratio less than 1
  • 7% of them have positive EBITDA and net losses before taxes
  • Lower, but satisfactory level of liquidity, since the current assets amount to 2.5 times the current liabilities
  • Higher debt levels, as liabilities exceed equity by 1.2 times
  • Adequate debt service ability, since EBITDA covers financial expenses by 11.9 times

Medium performer “c”

  • Low levels of efficiency and profitability, since the EBITDA margin is limited to 7.3% and the return on equity to 4.1%
  • 22.1% of medium performers have interest coverage ratio less than 1
  • 17.7% of them have positive EBITDA and net losses before taxes
  • Satisfactory, but limited liquidity, with current assets covering current liabilities by 1.5 times
  • High net debt level, which exceeds EBITDA by 13.6 times
  • Low level of debt servicing, since EBITDA covers financial expenses by 3 times

Underperformer “d”

  • Loss making, with EBITDA margin at -9.1%.
  • Inefficient management of equity, with a negative return on equity at -16.1%
  • Almost all underperformers (82.5%) have an interest coverage ratio that is less than 1
  • 18.3% of underperformers have positive EBITDA and net losses before taxes
  • Liquidity difficulties, since the current liabilities exceed the current assets (current ratio: 0.7 units)
  • Overleveraged, with 3.5 times higher debt than equity and net debt 25 times higher than EBITDA