Bond rating is a better barometer

NEW YORK – Given Wall Street’s hair-trigger propensity for punishing a company’s stock for bad news – and over-inflating the price for good news – it’s become harder to use share price as a useful indicator of a company’s overall health.

Corporate bond prices, however, could provide a more complete picture of a company’s prospects. Unlike stock investors, who tend to jump on and off a company’s bandwagon quickly, bond investors have a more long-term approach.

In their simplest form, corporate bonds work like Treasury bills or municipal bonds. A company sells notes to an investor, promising to pay interest over the life of the note, and to repay the principal at the end. Those bonds can be traded like stocks, with the price fluctuating based on the company’s fortunes.

A company’s bond credit rating can be somewhat useful in determining a company’s overall health, though not without caveats. Credit services assign credit ratings to corporate bonds, much like individual consumers have credit scores. Standard & Poor’s rating system goes from AAA, the top rating, to D, which means the company is in default or has gone bankrupt.

Ratings of AAA, AA or A mean the company is in good shape; CCC, CC or C ratings are considered junk bonds, meaning there is a substantial risk that the company may not be able to pay back the loan.