Question

How would you asses the overall risk structure of the company in terms of its operating risks and financial risks (debt to capitalization risk

Answer 1

Risk- It is the uncertainty, an unforeseen event that may occur in future.  

Operational risk- This risk is related to company's normal course of operations. Operational risk occurs when a company does business in an industry and it has many competitors in the same industry. This is different from financial and systematic risk. This risk occurs due to operational failure or human error or fraud and criminal activity in the business, a wrong decision may lead to loss for business.

Financial risk- This is related to capital structure decision, when there is heavy debt in company's capital structure, company's obligation increases and it has to pay higher interest on it. If company is not able to pay its debt, it files for bankruptcy, if company's debtors default in repaying the debt or payment of goods then also company suffers. Financial risk also refers to the possibility of shareholders of the company of losing money.

Overall risk- Overall risk is the mix of financial, operational, strategic and compliance risk in which financial and operational are the main risks that affect a company's revenues, profits and brand image in the market, companies try to minimize these risks, companies cut debt in the capital structure, have tight credit policy and pricing strategies so as to minimize the operational and financial risk.