Earnings (earn): designed by return on equity as we see in introduction, the rating influence the common stock prices and more with downgrade which generate or not income for common stockholders.
Return on assets (ROA) and Standard deviation of return of assets (sdROA):calculated using 5 years. This ratio motivates efficient management of the firm by the utilization of asset.
Operating cash flow (CFO): there are two cash flow ratios funds from operations relative to debt and free operating cash flow relative to debt.
Interest coverage (intcov): calculated as operating income before depreciation and interest expense, high earnings margins signify to the firm to generate cash so to minimize risk and to have better rating (Amato, 2004). A firm with problems of liquidity may be to default on current obligations.
Leverage (LEV): designed book value of liabilities to market value of equity. It tends to reduce free cash flow (Jensen, 1986) but an excess of debt can increase the capacity of bankruptcy and can reduce the rating.
Capital intensity (capint): calculated as property, plant and equipment net of depreciation deflated by total assets, strategic planning is critical for capital intensive 8 firms and can affect performance of the firm (difficulty of prevision of capital asset requirement) (Kukalis, 1991).
Reference: http://www.edhec-risk.com/edhec_publications/all_publications
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