Value in 60 Seconds: Equity Rating vs Credit Rating - which matters more? 7 July 2023

1 Aug 2023 · 1 min

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1:01

David Trainer explains why equity investors should care about credit ratings. A strong equity cushion, measured by return on invested capital minus cost of capital, usually means better debt metrics. Credit ratings are just another way of looking at the same fundamentals that matter to stock valuations.

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Some of our fixed income clients have found that when the equity cushion is really, really strong, that tends to be a good indicator for the debt as well. And then vice versa. If you've got a good equity cushion, an equity cushion would be defined as return on invested capital minus the cost of capital, it's going to result in a good equity rating and a good The other thing to keep in mind is that the credit rating is really another way to look at the fundamentals. To get an attractive stock rating, you've got to have good fundamentals and a cheap valuation. You can have good fundamentals and a bad valuation, in which case those 2 things will not align. It's not always apples to apples because the fixed income people care more about cash flow. They don't care about equity valuation.