Last Updated on May 31, 2026
Overview – Good Credit Rating = Good Investment?
Most working-age adults (or even some very young adults) are very familiar with their credit score. As a quick refresher, a credit score is a number (or numbers, based on different issuing agencies) assigned to people that determines their “creditworthiness”: a metric that determines how likely they are to repay any outstanding debts they have on time and in full.
Maintaining an excellent credit score is important because it directly influences a person’s ability to secure loans (mortgage, business, or personal) at favourable interest rates. It’s no exaggeration to say a person’s credit score can make or break their personal financial situation.
Similarly, individual companies and even sovereign states (i.e., countries) are also assigned a metric to determine their creditworthiness, but it goes by a slightly different name: credit rating.
Although credit ratings are used to determine a company or country’s creditworthiness, some people, namely investors, may be tempted to conflate this metric with investment merit. So, can credit ratings be used in place of in-depth investment analysis, be safely ignored, or is there some compromise between the two?
What Exactly Do Credit Ratings Tell Us?
To determine whether credit ratings can be used as an alternative measure of investment merit, we must first understand what exactly they are and what they tell us.
As we briefly mentioned earlier, a credit rating is a metric assigned to a legal entity (in the case of this discussion, companies and countries) that determines their ability to honour their outstanding financial liabilities.
For a company, this means its ability to pay the interest and repay the principal of its bonds, related debt instruments, and loans. For a country, this encompasses its ability to honour government-issued bonds and any sovereign-level loans (e.g., infrastructure loans from an international development bank).
While most countries have sovereign credit ratings, not all companies have one unless they request a rating agency to assign them one.
Although there are dozens of credit rating agencies around the world, the ones that are seen as the most prestigious and garner the most attention are the so-called “Big 3”: S&P Global Ratings, Fitch Ratings, and Moody’s.
When the Big 3 issue a credit rating, they also assign an “outlook”, which is interpreted as a hint of what a company or country’s credit rating may look like in the future. The three outlooks are Negative (chance of credit downgrade), Stable (no anticipated change in rating), and Positive (chance of credit upgrade).
Why Strong Credit Ratings Aren’t Immediately Signs of Strong Investment Merit
For those who view credit ratings as an alternative measure of investment merit, the logic they follow may go something like this:
“A strong credit rating is only possible if the company or country in question has abundant financial resources at its disposal. If a country or company has abundant financial resources, then that means it has strong economic fundamentals backing it, meaning it is an excellent place to park and subsequently grow your capital.”
At a glance, this logic appears sound, which is why it’s understandable that some people use credit ratings as de facto measures of investment merit. However, although most investment-worthy entities are likely to have strong credit ratings, the opposite isn’t always true. Why is that?
This is because an entity may have abundant funds to cover its liabilities, but this doesn’t mean they offer an environment that can grow your capital. In other words, some companies and countries may offer unmatched stability but limited growth potential.
Credit ratings and investment analysis study two very different things. One is concerned with an entity’s ability to honour its outstanding liabilities and nothing more; the other is focused on finding places that offer the highest likelihood of keeping an investor’s capital reasonably safe while simultaneously growing it at an acceptable rate.
Many large, established, publicly traded companies sport impressive credit ratings, yet may be unattractive investment destinations due to limited business growth prospects, and therefore stagnant stock prices and/or dividends.
Countries with developed markets usually sport near-perfect credit ratings. Despite this, many investors are increasingly turning their attention to emerging and frontier markets in search of better investment opportunities, despite these countries having weaker credit ratings than their developed peers.
Therefore, conflating credit ratings with investment merit may end up giving investors a flawed perception of a company or country’s ability to grow capital, potentially harming an investor’s portfolio in the process.
How Credit Ratings Can Still Be Helpful to Investors
Based on everything we’ve discussed so far, it may sound like credit ratings are of little use to investors and can be safely ignored, right? Not exactly. Although credit ratings and investment merit are distinct, this doesn’t mean they are strictly mutually exclusive. In other words, credit ratings still have their uses.
When studying individual companies, an investor’s primary method of determining investment merit will undoubtedly be their analyses, but credit ratings can help supplement their analytical work.
For example, if a company claims to have a “robust” balance sheet, yet all of the Big 3 credit agencies have assigned it with an extremely poor credit rating, then clearly the balance sheet (or another element of the company’s financials) isn’t as strong as it’s reported to be and may warrant deeper investigation. Such a discrepancy cannot simply be ignored.
Emerging and frontier market countries almost always have inferior credit ratings than their developed counterparts (though there are exceptions), and most investors who operate in these countries usually just accept that as a trade-off for potentially lucrative investment opportunities.
However, most governments from emerging and frontier markets understand that there are many benefits to achieving the highest sovereign credit ratings possible, such as securing lower interest rates on sovereign loans, making their government bonds more attractive to a broader group of investors, and demonstrating to the world that they have the policy know-how needed to one day join their developed peers.
So, if an emerging or frontier market country’s sovereign credit rating has remained stagnant for several years with no signs of improvement, or worse, has deteriorated, then even the most risk-tolerant investors may begin to ask if the governments of these countries are even trying to create a more investment-friendly environment or have the wrong policy priorities in mind.
So, although credit ratings can’t serve as a replacement for determining investment merit, they can still play a role in trying to ascertain it.
Wrapping Up
Many investors are familiar, or at least have heard of, credit ratings. They are relatively simple to understand yet can paint a very promising or gloomy picture of company our country’s financial health. Because of this, some investors may be tempted to treat credit ratings as de facto or alternative measures of investment merit.
It’s important to understand that credit ratings are simply a measure of a legal entity’s (e.g., company our country) ability to honour its outstanding financial liabilities. The problem is that some investors conflate “the ability to honour liabilities on time and in full” with “a place that can grow my capital”.
A company or country that sports a strong credit rating may offer unmatched stability, hence its strong ratings, yet may offer little or no potential for capital growth. That being said, they aren’t entirely worthless, and can be used as a supplementary tool to help investors ascertain investment merit.
