2010 Second International Conference on Modeling, Simulation and Visualization Methods
The Listed Company's Credit Rating Based on Logistic Regression Model Add
non-financial Factors
Yong Wei Shouxiang Xu
Software Engineering Department
Shenzhen Institute of Information Technology
Shenzhen, China
tsh-xyz@163.com
Abstract-This paper designs a set of enterprise credit rating
index system，in addition to traditional financial ratios ,it
joined the non-financial factors.then used the logical
regression approach to create company's credit rating model ,
the result shows that the overall discrimination rate reached
95%, the models predict results accurately.
Keywords-list company; non-financial factors; logistic
regression model
I INTRODUCTION
In the company's credit evaluation ，financial indicators
are still dominant, it has the nature of comparable and
measurable ,so it made the comparison within the industry
and historical data possible. However, company's credit
rating on financial ratios alone is not enough, other
non-financial factors also play a significant role . Compared
with the financial indicators, enterprise risk transfer
capacity, national economic policy, company industry status,
industry characteristics and other non-financial indicators
could more accurately reflect the company's future
development trends,could more comprehensively reflect the
operating results. Therefore, it plays an irreplaceable role in
the corporate credit analysis and evaluation .
II ENTERPRISE CREDIT EVALUATION INDEX SYSTEM
A. Financial Ratios Indicators
Nowerdays,enterprise financial evaluation indicators are
relatively numerous,it mainly classify with growth index、
viability index、solvency indicators、cash flow indicators
profitability index.
B. Non-financial ratios indicators
(1) Enterprise's financial risk transfer capability
Enterprises financial risk transfer capacity mainly
depends on the financial flexibility: mortgage, guarantee 、
insurance and other repayment protection, as well as when
the enterprises faced with unexpected financial needs,what
978-0-7695-4046-7/10 $26.00 © 2010 IEEE
DOI 10.1109/WMSVM.2010.69
Fanhua Meng
Department of Economics and Management
North China Electric Power University
Baoding, China
Mengfanhua85@163.com
appropriate measures can be used,such as the possibility to
emergency factoring in a variety of capital markets, the
possibility of financing to other companies and financial
institutions , asset size and asset liquidity.
(2) National economic policy
China's corporate finance credit risk has obvious
systemic source , the impact of national economic policy is
much greater than the western countries. National economic
policy palys an role of the national economy-oriented, adopt
different policies for different industries, to support or to
contain, and through integrated approach to reach
macro-control ： such as administrative, taxation, price,
supervision methods, thereby affecting business efficiency
and bank credit, so it is necessary to analyze the impact of
policy change on credit risk.
(3) Industry characteristics and development
Company runs in a certain macro-economic environment,
it mustt be subject to the country or even the world
economic environment.Credit analysts should always
concerned about the changes of macroeconomic
environment and its associated industrial policy , analysis
the impact on demand for products or services, raw
materials supply, profitability, asset quality and other
aspects ,analysis the industry is stable or is sensitive to
economic changes .
(4) Company’s industry status
The competitive position of enterprises can be measured
by a number of indicators，such as the market share of
products or services, the cost structure and its potential to
increase revenue and reduce expenditure, equipment and
technical level and so on. credit analysts should pay special
attention to the enterprises’ status in the same industry,
especially when adverse changes in the external business
environment, whether companies can maintain their ability
to obtain cash, to face the potential price competition and
new production challenges.
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 TABLE I. CREDIT RATING INDEX SYSTEM

General indicators Sub-index Indexcode

net profit growth rate X1
Growth index total assets growth rate X2
earnings per share growth rate X3
total asset turnover ratio X4

Viability index inventory turnover X5

accounts receivable turnover X6

Financial Indicators asset-liability ratio X7

Solvency indicators current Ratio X8
quick Ratio X9
maturity of debt principal and
X10
Cash Flow Indicators interest coverage ratio
net cash gold content X11
return on total assets X12
Profitability index
net profit margin X13
financial risk transfer capability financial flexibility X14
National economic policy National economic policy X15
Non-financial indicators
Industry characteristics and development X16
Industry conditions
company’s industry status X17

transformation. After Logit transformation, it can use the

III. THE THEORY OF LOGISTIC REGRESSION MODEL general linear regression model to establish dependency
model between variables and explanatory variables, that is :
When the explanatory variable is 0 / 1 binary variable, if LogitP = β 0 + β i xi
still use the simple linear regression model:
yi = β 0 + β i xi + ε i , then the mean of explanatory variables P
Then = exp( β 0 + βi xi )
1− P
E ( yi ) = β 0 + β i xi is the probability that the explanatory
P = (1 − P) exp( β 0 + βi xi )
variables is xi while yi = 1 . It can establish model use the
P = exp( β 0 + βi xi ) − P ∗ exp( β 0 + βi xi )
general linear multivariate regression model. The
explanatory variables range is between 0 ~ 1.that is: P[1 + exp( β 0 + βi xi )] = exp( β 0 + β i xi )
Py =1 = β 0 + β i xi exp( β 0 + β i xi )
P=
As the the range of probability P is between 0 ~ 1, while 1 + exp( β 0 + βi xi )
the explanatory variable in general linear regression model 1
P=
is between -∞～+∞ ,so it can make a reasonable conversion 1 + exp[−( β 0 + β i xi )]
of probability P, as its range anatomizes the general linear It is Logistic function, a typical growth function,
regression model.The conversion processing of probability
P should be non-linear transformation. expressed the non-linear relationship between probability
First, converted P into Ω : and the explanatory variables.
P
Ω= IV EMPIRICAL RESEARCH
1− P
It known as the occurrence ratio or relative risk, it is
the ratio of the probability that events occur and the event It selected 40 listed companies from the Shanghai
does not occur. Ω is also a monotone increasing function stock market at random as sample companies,of which 18
of P, it make the model easy to explain. ST unit as default samples, 22 normal stock as normal
Second: converted Ω into ln Ω : Samples.The relative data get from the annual financial
P statements of 2008.Sample companies selected from four
ln Ω = ln( ) representative industry: electric power, nonferrous metals,
1− P
ln Ω is known as LogitP , after this transformation, it real estate, machinery manufacturing, samples were
distributed as follows:
show a growth (or decline) consistency between LogitP
and Ω , the two-step conversion process is called Logit

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 TABLE II. SAMPLE DISTRIBUTION TABLE III .CASE PROCESSING SUMMARY
industry distribution default number normal number Unweighted Cases(a) N Percent

electric power industry 3 7 Selected Cases Included in Analysis 40 100.0

Missing Cases 0 .0
non-ferrous metal industry 5 5
Total 40 100.0
the real estate industry 5 5
Unselected Cases 0 .0
Machinery manufacturing industry 5 5
Total 40 100.0
This section use the 17 factors to create the logistic a If weight is in effect, see classification table for the total number of
regression model , it use SPSS software to estimate the cases.
coefficients:
The table above shows that the selected cases included
in analysis iss40,missing cases is 0.
TABLE IV. VARIABLES IN THE EQUATION
95.0% C.I.for EXP(B)

B S.E. Wald df Sig. Exp(B) Lower Upper

Step 1(a) X1 .032 2.830 .000 1 .991 1.033 .004 264.899

X2 6.316 85.375 .005 1 .941 553.544 .000 3E+075

X3 -.197 3.728 .003 1 .958 .821 .001 1224.345

X4 1267.007 17283.187 .005 1 .942 . .000 .

X5 -389.059 5280.795 .005 1 .941 .000 .000 .

X6 1.562 21.161 .005 1 .941 4.767 .000 5E+018

X7 13.333 185.254 .005 1 .943 617370.011 .000 3.E+163

X8 -3022.062 40881.309 .005 1 .941 .000 .000 .

X9 3372.282 45635.741 .005 1 .941 . .000 .

X10 6.751 93.139 .005 1 .942 854.904 .000 2E+082

X11 -7.446 102.629 .005 1 .942 .001 .000 1E+084

X12 13.139 188.200 .005 1 .944 508586.395 .000 8E+165

X12 -1.125 15.403 .005 1 .942 .325 .000 4E+012

X14 -1474.274 20074.210 .005 1 .941 .000 .000 .

X15 -1930.238 26105.432 .005 1 .941 .000 .000 .

X16 520.510 7322.445 .005 1 .943 1E+226 .000 .

X17 -266.310 3724.123 .005 1 .943 .000 .000 .

Constant 3064.225 41726.481 .005 1 .941 .

a Variable(s) entered on step 1

The table above shows test results of the explanatory companies credit risk assessment expression:
variables regression coefficient.It can obtain the listed

1
Pi = − (3064.225 + 0.032 x1 − 6.316 x2 − 0.197 x3 +1267 x4 − 389.059 x5 +1.562 x 6 +13.333 x7 − 3022.062 x8 +
3372.282 x9 + 6.751 x10 − 7.446 x11 +13.139 x12 −1.125 x13 −1474.27 x14 −1930.238 x15 + 520.51 x16 − 266.31 x17
1+ e

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If p 0.5, then classified as high-risk category, if p 0.5, classfication rate of normal companies is 94.7%, the overall
percentage is 95%.
then classified as low-risk category.
TABLE V. CLASSIFICATION TABLE(a) V CONCLUSION
As introducted the non-financial factors into the credit
Predicted rating index system,the company's overall discrimination
Observed rate of 95%, it shows that the model reached a very high
Whether Default
Percentage Correct
classification rate, this models predict results accurately.
0 1
Step 1 Whether Default 0 20 1 95.2 REFERENCES
1 1 18 94.7
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