Industry & Sector Allocation

Every Financial Health Rating is produced using an industry model built for companies with a similar operating profile, not a one-size-fits-all formula. Your industry model determines which financial ratios matter most and how they are weighted when your FHR is calculated. Alongside the industry model, your company is also assigned to a sector, which is used separately to benchmark you against peers operating in the same marketplace. This article covers how both assignments are made and why they matter.

RapidRatings assigns every company to the industry model that best fits its primary business activity, using a NAICS code as the starting point. The mapping schematic that connects codes to models is maintained by RapidRatings, and the same assignment logic applies to both public and private companies.

To make sure your assignment is accurate, include a NAICS code and a short description of your primary business activity when you submit financial data. If you do not know your NAICS code, you can search for it in the FHR Exchange portal or at naics.com/search.

The right industry model depends on what your company actually does, not the market you sell into. For example, the Wholesale Trade model rates companies distributing goods across many different sectors of the economy. Those firms may work with different partners, in different geographies, and sell very different products, but they share similar working capital utilization, fixed asset profiles, and profitability characteristics, which is what the Wholesale Trade model measures. Companies allocated to a common model may not look exactly the same, but they share similar quantifiable risk profiles.

If your NAICS code or primary business activity has changed since your last rating, or if your assigned model does not fit your business, contact your RapidRatings Member Services team to review the assignment.

The financial profile of a healthy company varies from industry to industry. A working-capital-heavy wholesaler and a capital-intensive utility both need strong financial health, but the ratios that signal that health look very different for each. Conventional risk models often apply a single formula to every company, which produces less accurate results across a diverse universe of firms.

RapidRatings addresses this by running 22 different industry-specific models in everyday ratings. Each model has its own proprietary ratio weightings, calibrated on companies with a similar operating profile. The result is a more accurate reading of financial health than a general-purpose model can produce.

There is always a trade-off between industry granularity and sample size when building financial models. Using more models produces a closer fit to any single company. Using fewer models produces more stable, better-calibrated results. Our 22-model framework sits on the granular end of that trade-off while still keeping every model well-calibrated on a large dataset.

RapidRatings maintains 24 industry models in the overall methodology, of which 22 are applied in everyday ratings. The two models not applied in day-to-day ratings are Insurance and All Services: insurance companies are typically grouped within Other Services or Financial Diversified rather than being rated under the Insurance model, and the All Services model is not used in production ratings.

The 22 models applied to member ratings are:

For details on the 68 financial ratios the Core Health model applies within each industry model, see Ratios & Performance Categories.

Industry model and sector allocation are two separate assignments, used for two different purposes.

Industry model determines how your FHR is calculated. It sets the ratio weightings the Core Health model uses to score your financial health.

Sector allocation determines who your company is benchmarked against in the FHR Report. Sector classifications are aligned with Russell Index Sector Allocations and support peer comparison, not FHR calculation.

Every company has one industry model and one sector, and the two will not always share the same category label. For example, a food and beverage manufacturer sits in the Food, Drink and Tobacco industry model and the Food, Beverage and Tobacco sector: similar names, but the industry model is used to produce the FHR and the sector is used to benchmark against peer companies in the same marketplace.

For more on how peer benchmarking uses your sector allocation, see Peer Benchmarking.

The 31 sector classifications are: