Credit Risk

Understanding Company Specific Risk

By Julia O’Neal; MA, CPA  

 

There are several kinds of investing risk, for example:

  • Credit or company specific risk refers to the firm’s business and financial risks.
  • Business risk is the risk inherent in the nature of the business.
  • Financial risks are those in addition to business risk that arise from financial leverage [credit or debt].  

Business Risk Example 

An example of high business risk would be a computer component manufacturer whose product demand is highly sensitive to macroeconomic activity and who has small profit margins.  

Assessment 

A company’s unique business risk would be increased by adding debt to an already unpredictable business. 

Conclusion 

Can you appreciate that credit risk is associated with a firm’s ability to meet financial obligations on the securities [bonds, notes and obligations, etc.] it issues?

More importantly, do you invest with this risk in mind? 

More info: http://www.springerpub.com/prod.aspx?prod_id=23759 

Individual: http://www.jbpub.com/catalog/0763745790/ 

Institutionalwww.HealthcareFinancials.com 

Terms: www.HealthDictionarySeries.com

Leave a comment