The zone score tries to capture the so-called country risk. All other Gradement scores for a particular company capture features relating to that company. For example, profitability, solvency, dividends, growth. All are scores calculated from internal data of the company.
The zone score is different from the rest in the sense that it is calculated based on elements external to the company. This score is calculated based on factors associated with the country in which the company has its registered office. It is important to consider these factors because the country or geographical area in which the company operates is of paramount importance in the future evolution of the business and will therefore also have an important influence on the other scores associated with the company.
How to use the score
The Zone score attempts to capture the country risk in a value that will range from 0 to 100. The value of this score is not included in the Grade calculation so you will have to consider it when considering an investment in a particular country. The following table can serve as a reference for assessing the risk of a particular country based on this score:
|Score value range||Country risk level|
|from 0 to 5||Extensive Risk|
|from 5 to 7||Slight Risk|
|from 7 to 10||Minimum Risk|
The so-called country risk, which captures this Zone score, includes, among others, the following types of risks:
- Political risk. The risk of an investment being affected by political instability or government decisions regarding taxes, expenditures, regulations, labor legislation, or tariff setting.
- Exchange rate and interest rate risk. Since, in advanced economies, always one of parties in any economic exchange is a commodity known as money, the monetary policy of the central bank has an enormous influence on the business of any company operating with the currency issued by the central bank. Increases in the monetary suply will create inflation, and the manipulation of interest rates will create economic bubbles (expansive and contractionary cycles more or less localized in one or several economic industries). Both effects, inflation and economic bubbles, will have a significant influence on both the company's business performance and its stock market price.
- Economic risk. It includes all those (macro)economic factors of a country that may affect the evolution of the company. For example, unemployment rate, income per capita, level of accumulated physical and human capital, etc.
- Sovereign risk. Risk that the central bank or the government of the country will not fulfill its contractual obligations. For example, the default of the public debt or the bankruptcy of the social security system.
The Zone score attempts to capture all the risks described above. Its calculation is based on the Economic Freedom Index published by The Heritage Foundation. This index is a perfect proxy for country risk. The index is calculated based on ten quantitative and qualitative factors grouped into four main categories:
- Legislation. Includes property rights and level of corruption.
- Size of government. Includes tax level and government spending.
- Regulations. It includes ease of doing business, job market regulations and currency stability.
- Market opening. It analyzes the facility to import and export both economic and financial goods and services.