NGX listing alone insufficient to assess corporate risks – DataPro

Companies seeking to raise funds from Nigeria’s capital market may need to look beyond stock exchange listing to strengthen investor confidence, as credit ratings provide an independent assessment of their ability to meet financial obligations, particularly when accessing debt financing.

DataPro, a Nigerian credit rating agency, said although companies can list their shares on the Nigerian Exchange Limited (NGX) without obtaining a credit rating, the two serve complementary purposes in helping investors understand businesses, their financial strength and associated risks.

According to DataPro in its Monthly Rating Brief for November, while equity investors acquire ownership interests and typically focus on earnings growth, valuation and potential returns, credit ratings provide an independent assessment of an issuer’s creditworthiness, including its capacity and willingness to meet financial commitments.

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The agency said the distinction becomes increasingly important as listed companies diversify their funding sources and seek to raise capital through instruments such as corporate bonds and commercial paper.

A credit rating provides an additional layer of information beyond financial statements, corporate disclosures and historical performance, helping investors assess the financial risks associated with an issuer.

DataPro explained that credit ratings examine factors relevant to a company’s ability to service its obligations, offering a perspective that complements existing information about its business model, competitive position, strategy, governance and cash flows.

However, the agency stressed that a credit rating does not constitute an investment recommendation or replace investors’ assessment of a company’s valuation, growth prospects and overall investment suitability.

Rather, it provides an independent view of an issuer’s financial strength and credit risk, which can help investors make more informed decisions.

The importance of credit ratings becomes more pronounced when companies approach the debt market to raise funds.

In Nigeria, corporate bonds are required to be rated by a rating agency registered with the Securities and Exchange Commission (SEC), making credit ratings an important component of the information available to investors participating in the bond market.

For debt investors, the central consideration is whether an issuer can meet its financial obligations as they fall due, including interest payments and principal repayment.

This differs from the priorities of equity investors, who are generally more concerned with a company’s growth trajectory, profitability and potential shareholder returns.

Despite these differences, DataPro noted that both groups are assessing the same underlying business, making reliable and independent information about its financial position and risks valuable to the broader capital market.

For listed companies, credit ratings can therefore complement existing disclosures and financial statements, particularly as they engage with different categories of investors and explore alternative financing options.

The agency said the broader significance lies in the role credit ratings play in improving market information and supporting investors’ understanding of corporate risk.

As companies increasingly seek to diversify funding beyond equity capital, the distinction between listing and credit rating is expected to remain important in shaping how businesses access Nigeria’s capital market.

Ultimately, stock exchange listing provides companies with access to equity investors, while credit ratings offer an independent assessment of their ability to meet financial commitments.

Both mechanisms serve different purposes but contribute to a more comprehensive understanding of companies, their financial risks, and their participation in the capital market.