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Business Overview
Stock Rating System

1.Three Grades of Stock Rating

IRI's stock rating system consists of the following three grades:

A=Buy: The stock price is considered more than 20% below its fair value.
B=Neutral: The stock price is considered within 20% plus or minus its fair value.
C=Sell: The stock price is considered more than 20% above its fair value.

In addition, IRI provides the following ratings:
(1) Growth rate rating (rating on medium-term earnings growth prospects):
Rating on prospective growth of earnings per share for the coming three fiscal years starting from the current fiscal year, unless earnings are already announced for the first three quarters of the current fiscal year, in which case the coming three fiscal years will start from the next fiscal year. Aberrational changes in profit (loss) and taxation are excluded from consideration.
(2) Risk rating:
Comprehensive rating on risk of change in financial conditions and business results, risk relating to management executives and other corporate risks. Risk rating is classified into three grades - LR (low risk), MR (medium risk) and HR (high risk) - depending on the degree of risk involved.

2.Valuation to Obtain a Fair Value

The fair value of a stock is calculated on the basis of its expected earnings growth rate, with allowance for risk premiums unique to individual stocks. In the case of small- and mid-cap growth stocks which IRI specializes in, risk premiums are generally considered to be higher than the market average. And individual stocks have unique unsystematic risks resulting in another premium. IRI combines both risk premiums (namely, small- and mid-cap stock risk premiums and unsystematic risk premiums) as "Risk Premiums Unique to Individual Stocks."

Further comments on "Risk Premiums Unique to Individual Stocks"
IRI's Risk Premiums Unique to Individual Stocks stand out as they are a combination of RPs (risk premiums on small- and mid-cap stocks) and RPu (unsystematic risk premium attributable to individual stocks). The following formula is employed in IRI's valuation:


"Unsystematic Risk Premium Attributable to an Individual Stock" includes the following items:
(1) Risks attributable to an individual industrial sector
(2) Volatility of returns
(3) Leverage
(4) Factors unique to an individual industrial sector:
    (i) Degree of concentration of customer base
    (ii) Dependency on key personnel
    (iii) Dependency on main suppliers
    (iv) Abnormality of competition
    (v) Potential regulatory changes
    (vi) Potential litigation
    (vii) Other factors