Score, scoring or... credit scoring?

The terms "score", "rating" or "rating" are often used indiscriminately to qualify an evaluation of credit risk or solvency. However, these notions are distinct and must be well defined to avoid any confusion.

These two concepts have a common objective, which is to measure the risk of insolvency. However, their application and construction methodology are not the same. Moreover, the score can also measure a risk of default.

The score, also called by the Anglo-Saxons, "scoring", or "credit scoring", is determined by an automatic and statistical calculation model. It is based on an algorithm and the use of data, without any human intervention. Within the framework of the calculation of this indicator, there is therefore no intervention by a financial analyst.

It can be produced by the companies themselves or by service providers, such as companies specialized in business information. It can also be produced internally by banks and insurance companies for their own use. For this purpose, it is based on a statistical analysis of the data available to them.

The score is therefore generally used by SME or ETI type companies to evaluate the financial health of their customer or supplier counterparts. This indicator, often linked to financial ratios, contributes to decision making.

 

Financial rating, rating or... credit rating?

On the other hand, financial rating is very different from score. The term "notation" is the French translation for what the Anglo-Saxons call "rating" or "credit rating".

Who has never heard or read the acronyms for "AAA" and "BBB" ratings, those coveted seals of approval for both companies and governments? And for the uninitiated, ratings are synonymous with Standard & Poor's, Moody's and Fitch, the famous "Big 3".

As you can see, a rating is an indicator of the credit quality of a financial instrument or its issuer, whether it is a company, a State or a local authority (definition of the EU Regulation 1060/2009 on rating agencies).

Unlike a score, which is calculated on the basis of a statistical model, a rating is produced by an analyst taking into account both quantitative and qualitative data. Human intervention is therefore an integral part of the rating process.

Financial or credit ratings are generally requested by large listed companies. However, its scope increasingly covers medium-sized companies, the so-called "Mid-Caps".

 

Indicators used for extra-financial information?

Current trends in corporate social responsibility and ESG (Enterprise, Social, Governance) criteria are conducive to the emergence of new indicators. Whether they are scores or ratings, these evaluations are already produced on these themes. It is therefore not to be excluded that the confusion surrounding these terms in the context of financial analysis is very similar for extra-financial analysis.