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.

BREAKING DOWN '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.

  1. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. ...
  2. Systematic Risk

    The risk inherent to the entire market or entire market segment. ...
  3. Liquidity Risk

    The risk stemming from the lack of marketability of an investment ...
  4. Risk

    The chance that an investment's actual return will be different ...
  5. Country Risk

    A collection of risks associated with investing in a foreign ...
  6. Market Risk

    The possibility for an investor to experience losses due to factors ...
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  1. What are financial risk ratios and how are they used to measure risk?

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