Definition for : Credit scoring

Credit scoring is an analytical technique used for carrying out a pre-emptive check-up of a company. The basic idea is to prepare ratios from companies' accounts that are leading indicators (i.e. two or three years ahead) of potential difficulties. Once the ratios have been established, they merely have to be calculated for a given company and cross-checked against the values obtained for companies that are known to have run into problems or have failed. The ratios are combined in a function known as the Z-score that yields a score for each company.

(See Chapter 8 How to perform a financial analysis of the Vernimmen)

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