Describe Financial Risks

A financial risk is the lack of ability of a company to comply with their financial obligations and the extent of the risk is measured by the amount in debt related to the goods and assets they hold.

A company that has a great proportion of debt in relation to their assets will denote an increase that indicates that in a certain point it will not be able to pay the capital nor the interests.

While larger the amount in debt in relation to goods higher will be the financial risk because the company will have to get enough resources to pay off at least the fixed interest and the loan of capital.

When a company manages a high interest rate in relation to its goods or assets the company turns into an insolvency risk (credit risk).

Besides the financial risk, the negotiation risk can also be classified as an insolvency risk due to the fact that assessing agencies have re-classified the market price over their stocks and bonds to a lower position.

The agencies that evaluate risks appraise the valued-titles of companies based on the ability to pay their obligations to stockholders bond bearers. When these values area degraded  the creditor can then put some restrictions to the mentioned company. These restrictions could be limiting a greater indebtedness or the payment of dividends, and although they could not be considered as a problem the company to be in trouble having to pay the imposed restrictions in a low sales season.

Companies that have few or no debts have few or no financial risks. By looking at a company’s balance sheet we will be able to compare the total amount of the accumulated debt with their assets. In the worst situation the financial risk as well as the business one could lead the company to a bankruptcy making worthless all its values.

To reduce the financial risk one must invest in values of companies with less indebtedness than assets it may have. In these times companies use the Internet to search for information that could determine future business. Since that information could generate a risk two categories have been created: systematic and non-systematic.

The non systematic risk is the specific risk of a company or industry. This risk has to do specifically  with a business, operation or finances of the company and it is called a risk operation. Risk operations refer to any type of risk contingency such as a CEO death, a worker strike  or  litigation. The non systematic risk is also known for its diversified risk.

Systematic risk is caused by factors that affect all valued titles. Systematic risks involve risk caused by external matters such as market risks interest rates risk, exchange rate risks, liquidity risks and buying capacity risks. One cannot reduce the market risk through diversification.