Business Risk

Loading the player...

What is 'Business Risk'

Business risk is the possibility that a company will have lower than anticipated profits, or that it will experience a loss rather than a profit. Business risk is influenced by numerous factors, including sales volume, per-unit price, input costs, competition, overall economic climate and government regulations. A company with a higher business risk should choose a capital structure that has a lower debt ratio to ensure that it can meet its financial obligations at all times.

BREAKING DOWN 'Business Risk'

Investors in a company are exposed not only to business risk, but also to financial risk, liquidity risk, systematic risk, exchange-rate risk and country-specific risk. To calculate business risk, analysts use four simple ratios: contribution margin, operation leverage effect, financial leverage effect and total leverage effect. For more complex calculations, analysts can incorporate statistical methods.

RELATED TERMS
  1. Market Risk

    The possibility for an investor to experience losses due to factors ...
  2. Operational Risk

    A form of risk that summarizes the risks a company or firm undertakes ...
  3. Country Risk

    A collection of risks associated with investing in a foreign ...
  4. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company ...
  5. Specific Risk

    Risk that affects a very small number of assets. Specific risk, ...
  6. Accepting Risk

    A risk management method used in the business or investment field. ...
Related Articles
  1. Professionals

    Risk Management Framework (RMF): An Overview

    A company must identify the type of risks it is taking, as well as measure, report on, and set systems in place to manage and limit, those risks.
  2. Economics

    Explaining Business Risk

    Business risk is the risk associated with the overall operations of a business entity.
  3. Investing Basics

    The Optimal Use Of Financial Leverage In A Corporate Capital Structure

    The amount of debt and equity that makes up a company's capital structure has many risk and return implications.
  4. Investing

    Operating Leverage Captures Relationships

    Find out how fixed and variable costs interact to shed new light on old companies.
  5. Retirement

    Risk and Diversification: Different Types of Risk

    Let's take a look at the two basic types of risk: Systematic Risk - Systematic risk influences a large number of assets. A significant political event, for example, could affect several of the ...
  6. Entrepreneurship

    Why Companies Need Risk Management

    Implementing risk management strategies can save an entire organization from failure. Is yours up to snuff?
  7. Investing

    Systematic Risk

    Systematic risk, also known as volatility, non-diversifiable risk or market risk, is the risk everyone assumes when investing in a market. Think of it as the overall, aggregate risk that comes ...
  8. Investing

    Understanding The Leverage Ratio

    Learn more on how the leverage ratio is used to calculate a company's ability to meet financial obligations and how changes in output will affect operating income.
  9. Economics

    Financial Leverage In Corporate Capital Structure

    Corporate management uses financial leverage to increase earnings per share and return-on-equity.
  10. Personal Finance

    How to Reduce Risks In Small Business

    Small business owners have better tools to control risk than ever before, making the whole concept of running your own business a little less daunting.
RELATED FAQS
  1. What are the key differences between financial risk and business risk to a company?

    Understand the difference between a company's financial risk and its business risk, along with some of the factors that affect ... Read Answer >>
  2. What are the major categories of financial risk for a company?

    Examine four major categories of financial risk for a business that represent potential problems that a company may have ... Read Answer >>
  3. What are the components of the risk premium for investments?

    The risk premium is the excess return above the risk-free rate that investors require as compensation for the higher uncertainty ... Read Answer >>
  4. How does operating leverage affect business risk?

    Learn how operating leverage affects business risk and how companies measure it. Review a relevant example of operating leverage ... Read Answer >>
  5. What are some examples of risk management techniques?

    Understand what risk management is in business and why it is a necessary component of ongoing business planning, and review ... Read Answer >>
  6. Besides operating leverage, what are other important forms of leverage for businesses?

    Learn about what other forms of leverage exist for businesses besides operational leverage, and the primary leverage metrics ... Read Answer >>
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center