How do you evaluate company credit ratings?


Quick Answer

A company's credit rating indicates the investment grade of its bonds, its creditworthiness and its level of risk, says Investopedia. Ratings agencies assign credit ratings as a reflection of an entity's willingness and ability to keep its financial commitments or debts. An AAA rating indicates an excellent investment grade with high creditworthiness and an extremely low risk of default. A C or D rating indicates a very low-quality investment or a junk bond.

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Full Answer

Investors should not make decisions based solely on credit ratings, but should research additional information regarding a company or other entity as part of the decision-making process, advises Investopedia. Credit ratings are not recommendations to invest or warnings to sell; they are tools that evaluate the ability and willingness to repay debt. Additionally, investors can find important information by researching the initial bond rating and frequently reviewing the bond's rating over its lifetime.

Credit ratings provide an independent and objective assessment of a company or country's creditworthiness and the amount of risk involved in the investment of capital with that entity, explains Investopedia. The three top agencies that provide credit ratings are Fitch, Moody's, and Standard and Poor's, also known as S&P's. These companies assign ratings to short- and long-term debt obligations, securities, preferred stock, loans and insurance.

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