In This Issue: A Closer Look At Industrials Ratings Methodology: The rating methodology used by Standard & Poor's focuses on fundamental analysis. Not surprisingly, our conceptual model hasn't changed significantly, but there have been some shifts over time that reflect greater complexity and volatility. Today's ratings analysis puts a lot more emphasis on cash flow and liquidity than in the past.Country Risk Conditions Can Affect A Company's Creditworthiness: Country risk continues to be a critical component of Standard & Poor's ratings, particularly for issuers in emerging markets. Because a company's performance may be affected positively or negatively by government polices and actions, we weigh this risk within the other business and financial risks factors and have developed a methodology to assess country risk. Industry Risk Analysis Sets The Stage For Issuer-Specific Analysis: The goal of this initial phase of business risk analysis is to develop a robust understanding of the company's external business and operating environment. Industry analysis focuses on the strength of industry prospects, as well as identifying the competitive factors, risks, and challenges effecting participants in that industry. Evaluating Competitive Position And Profitability: More Than Just A Numbers Game: Competitive positioning and profitability are two critical components of Standard & Poor's analysis of a company's business risk profile. Market shares and profitability ratios, for instance, provide strong evidence of a company's relative positioning. Credit analysis must, however, extend well beyond these factors. In fact, our views on the sustainability of both business positions and profitability measures in an adverse market environment have more influence on the rating outcome than bare operating statistics. How Company Management Influences Business And Financial Risk Scores: Standard & Poor's evaluates a company's management from a credit perspective and then factors that evaluation into our rating analysis. Management is assessed for its role in determining strategic and operational success, and also for its risk tolerance. The first aspect is incorporated in the business risk analysis; the second is weighed as a financial risk factor. Taking Account Of Accounting And Financial Reporting Aspects In Analyzing Financial Risk: A company's financial reports are the starting point for Standard & Poor's financial risk analysis of a rated entity. In addition to providing a basic set of financial statements, the financial reports also provide analysts with an abundance of additional pertinent financial and nonfinancial information, such as operating data, data on liquidity, governance, internal controls, litigation and contingencies exposures, and on risk management practices. Cash Flow Adequacy: Profit Is An Opinion, Cash Is A Fact: Cash flow analysis is the single most critical aspect of credit rating decisions. An enterprise's capacity to pay debts or any other obligation, the core underlying concept of a credit rating, is determined by the ability to generate cash-not earnings. Depending on the accounting method used by an enterprise to report its activities, or even on the choices it makes within a single accounting method, the resulting income statement and balance sheet could be very different. Capital Structure Analysis: Looking At How The Debt Stacks Up: Analyzing the capital structure of a firm is a key component of Standard & Poor's financial review. We assess how much financial flexibility a firm has by considering the terms of its debt and the amount of its debt relative to its cash flow and/or equity. Additionally, we consider the relative ranking of each debt instrument in the capital structure, and contemplate the protection afforded by the value of the firm and/or the individual assets that are pledged as collateral. A Closer Look At Industrials Ratings Methodology: Liquidity: Standard & Poor's seeks to determine the likelihood that a company might run out of cash and be unable to service its debt. We focus on assessing a company's ability to meet its financial obligations on an ongoing basis: given the challenges the company faces in its industry, its competitive position in that industry, its earnings and cash flow-generating ability, and its debt-service requirements. | 
