Financial Risk
 |
Definition of 'Financial Risk'The possibility that shareholders will lose money when they invest in a company that has debt, if the company's cash flow proves inadequate to meet its financial obligations. When a company uses debt financing, its creditors will be repaid before its shareholders if the company becomes insolvent.Financial risk also refers to the possibility of a corporation or government defaulting on its bonds, which would cause those bondholders to lose money. |
 |
Investopedia explains 'Financial Risk'Investors can use a number of financial risk ratios to assess an investment's prospects. For example, the debt-to-capital ratio measures the proportion of debt used, given the total capital structure of the company. A high proportion of debt indicates a risky investment. Another ratio, the capital expenditure ratio, divides cash flow from operations by capital expenditures to see how much money a company will have left to keep the business running after it services its debt. |
Related Definitions
Articles Of Interest
-
Beta: Gauging Price Fluctuations
Learn how to properly use this measure that can help you meet your criteria for risk. -
Using Enterprise Value To Compare Companies
Learn how enterprise value can help investors compare companies with different capital structures. -
Will Corporate Debt Drag Your Stock Down?
Borrowed funds can mean a leg up for companies, or the boot for investors. Find out how to tell the difference. -
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 associated with risky assets. The five main risks that comprise ... -
Zero-Coupon Bond
A zero-coupon bond or ‘no coupon’ bond is one that does not disburse regular interest payments. Instead, the investor buys the bond at a steep discount price; that is, at a price ... -
Hormel Transforming, But Valuation Already Ahead Of It
Hormel is very well-run and has above-average growth prospects, but investors have already bid the shares up accordingly -
It's Still Miller Time In The Emerging Markets
SABMiller is expensive, but the company's long-term growth potential in emerging markets is enormous. -
Financial Markets: Capital Vs. Money Markets
Two commonly used components of the financial market are money markets and capital markets. Find out the similarities and differences between them. -
After Some Preening, American Eagle Could Fly Again
Management has to reinvest in the business, but the market seems to be undervaluing American Eagle's cash flow prospects. -
Cost Improvements Are Good, But Hewlett-Packard Needs Revenue Growth
Restructuring seems to be helping margins, but HP needs revenue growth to really turn around
Free Annual Reports
