Credit investors and equity investors want different things. Equity investors chase stock appreciation and future cash flows. Credit investors focus on current cash flows and the balance sheet, and they're more risk-averse because they get paid first if the company fails.
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So when we were thinking about how to develop a credit rating, we had to think about the difference between equity investors and credit investors, because that distinction's really important. We have an equity rating system, but the credit rating system is going to have to be different in a lot of different ways, and that's based on what credit investors are looking for as opposed to what equity investors are looking for. What this slide really does is highlight the difference between the two. So when you think about equity investors, they benefit from stock appreciation. So if the value of the company goes up and the stock goes up, they gain from that. Whereas a credit investor, they don't really participate in the stock appreciation. They don't benefit from the capital gains. Alternatively, they don't lose from the capital losses, but that's a distinction to keep in mind. Equity investors are also really investing in the future cash flows of the business. So you see that a lot with these companies that are IPOing lately that are highly unprofitable. You really are only investing in those companies because you think 10, 20, 30 years down the line, they're going to turn into the next Amazon, the next Apple. Really, as an equity investor, that is what your focal point is. That's why we focus a lot on DCFs and future cash flows. Whereas a credit investor, you're really more focused on what are the cash flows today and What has the company done leading up to this point? And that's similar to just like a credit score that you might get individually. So if they look at your credit score, they're going to look at your credit history up until this point, and they're going to look at your current financial information. That is not to say that credit analysts don't care at all about the future. They certainly do. The company, if it's heading for bankruptcy, is certainly an interesting thing to keep in mind, but they don't necessarily benefit from the growth of the company, so they don't look out That far into the future. For equity investors, they care about the valuation of the business. It's imperative to their investment decision. You certainly would want to buy a company that's cheaply valued that they think is undervalued and then sell a company that's overvalued. Credit investors, the valuation really doesn't matter. You're not investing in the company or the growth of the company, so that stuff is not as relevant. This is a big point too. The balance sheet analysis for equity investors can be an afterthought. It's not a new construct. We care deeply about the balance sheet as well as the income statement and the cash flow statement. But for a lot of people, equity investors, the balance sheet can be a secondary afterthought in their analysis. Credit investors, the balance sheet is imperative. It's a very important thing for them to look at. They can't have it be an afterthought. And then also lastly, equity investors are less risk-averse. That's apparent. They're willing to go down with the ship. If you buy a stock, you're willing to accept that that stock might go to zero. Credit investors do have some downside, but it's much more limited because they have seniority in the case of liquidation. So they're more risk-averse. They don't want to take as much risk. That, those are the key distinctions between equity and credit investors and something that we have to keep in mind when we're developing the credit rating system.
