Financial Health Grade

A financial health grade is a model-based measure of predicted financial default that estimates if a company's assets could sufficiently cover its liabilities.

Morningstar uses structural or contingent claim models to calculate this grade. Structural models take advantage of both market information and accounting financial information. The firm’s equity in such models is viewed as a call option on the value of the firm’s assets. If the value of the assets is insufficient to cover the firm’s strike price, default is expected. To estimate a distance to default, the value of the firm’s liabilities is obtained from the firm’s latest balance sheet and incorporated into the model. We then rank the calculated distance to default and award 10% of the universe A's, 20% B's, 40% C's, 20% D's, and 10% F's. Morningstar calculates this figure in-house on a daily basis.