Showing posts with label financial risk. Show all posts
Showing posts with label financial risk. Show all posts

Sunday 23 December 2012

What are the 3 financial risks in an investment?

What causes financial risks in an investment?

1.  Excessive debt
"Only when the tide goes out do you discover who's been swimming naked."  - Warren Buffett. 
Companies incur debts because they want to speed up time.  They can own assets now instead of waiting for them later.  Why is speeding up time a bad thing?
These are often the companies and people with a lot of debts when the market collapses.

2.  Overpaying for an investment.
Price is what you pay.  Value is what you get.  - Warren Buffett
The asset quality has not changed.  The market conditions has not changed.  The poor investment was based on the initial price paid, not the quality of the asset.  The investor overpaid to own the asset or stock.

3.  Not knowing what you're doing.
"Risk comes from not knowing what you're doing." - Warren Buffett.
Why do people value the ownership of a house but not value the ownership of a company?
People understand how to value a house.  Many people do not understand how to value a company or stock.  They definitely do not understand the value of the company when they are broken down into many shares.  So, that is the true risk here and if you are the type of person who buys company shares and never look at what they are worth and buying on the basis that "well I like this company", you are probably setting up yourself up for buying too high above the true value of the share.



Sunday 21 October 2012

The Sources of Risk in Stock Investing

Total Risk = Unsystematic Risk + Systematic Risk

Unsystematic Risk (diversifiable)
Business Risk
Financial Risk

Systematic Risk (nondiversifiable)
Market Risk
Interest Rate Risk
Reinvestment Rate Risk
Purchasing Power Risk
Exchange Rate Risk






















Tuesday 2 October 2012

The Sources of Risk in Stock Investing

Total Risk = Unsystematic Risk + Systematic Risk

Unsystematic Risk (diversifiable)
Business Risk
Financial Risk

Systematic Risk (nondiversifiable)
Market Risk
Interest Rate Risk
Reinvestment Rate Risk
Purchasing Power Risk
Exchange Rate Risk



Sunday 24 June 2012

Corporate Finance - Business and Financial Risk



To further examine risk in the capital structure, two additional measures of risk found in capital budgeting:

1.Business risk
2.Financial risk

1.Business RiskA company's business risk is the risk of the firm's assets when no debt is used. Business risk is the risk inherent in the company's operations. As a result, there are many factors that can affect business risk: the more volatile these factors, the riskier the company. Some of those factors are as follows:
  • Sales risk - Sales risk is affected by demand for the company's product as well as the price per unit of the product.
  • Input-cost risk - Input-cost risk is the volatility of the inputs into a company's product as well as the company's ability to change pricing if input costs change.

As an example, let's compare a utility company with a retail apparel company. A utility company generally has more stability in earnings. The company has les risk in its business given its stable revenue stream. However, a retail apparel company has the potential for a bit more variability in its earnings. Since the sales of a retail apparel company are driven primarily by trends in the fashion industry, the business risk of a retail apparel company is much higher. Thus, a retail apparel company would have a lower optimal debt ratio so that investors feel comfortable with the company's ability to meet its responsibilities with the capital structure in both good times and bad.


2.Financial RiskA company's financial risk, however, takes into account a company's leverage. If a company has a high amount of leverage, the financial risk to stockholders is high - meaning if a company cannot cover its debt and enters bankruptcy, the risk to stockholders not getting satisfied monetarily is high.

Let's use the troubled airline industry as an example. The average leverage for the industry is quite high (for some airlines, over 100%) given the issues the industry has faced over the past few years. Given the high leverage of the industry, there is extreme financial risk that one or more of the airlines will face an imminent bankruptcy.


Read more: http://www.investopedia.com/exam-guide/cfa-level-1/corporate-finance/business-financial-risk.asp#ixzz1yewzbr6X

Thursday 22 January 2009

Financial risk

Financial risk

Financial risk is associated with the bottom of the income statement; it deals with earnings and how business risk and the financial structure of the firm impact them.

This type of risk is related to the firm’s use of financial leverage (debt).

Interest payments are fixed costs the firm must pay to stay out of bankruptcy, regardless of the firm’s profitability.

Some people, in fact, will say that a firm with no debt has no financial risk.


Also read: Understanding Risk
Partitioning Risk
Business risk
Financial risk
Purchasing power risk
Interest rate risk
Foreign exchange risk
Political risk
Social risk

Wednesday 6 August 2008

Assessing Investment Risks using B-FLExCo

This is how I assess investment risks of the companies that I wish to invest in. I have shortened this to B-FLExCo.

This abbreviation stands for:

B = Business risk
F = Financial risk
L = Liquidity risk
Ex = Exchange risk
Co = Country risk (Also, known as political risk)

At the moment, there is significant political risk for those investing in the KLSE. Accordingly, many KLSE counters are trading at a discount reflecting this risk and other prevailing risks.