Risk Factors

Credit Risk

1

The financial health of a company is a big risk for investors. If a company is not able to meet it’s liabilities, it can have a sizeable impact upon the stock price of a firm.

2

The ultimate consequence is that a company can go out of business, which can result in investors being left with nothing. This is simply because investors are owners of the firm.

3

In order to assess the financial health of a firm, investors can use a ratio called the current ratio. The formula is: current assets ÷ current liabilities. A ratio between 1 and 2 is desirable.

4

If a company has a high current ratio (above 2), this can be a bad sign. This is can indicate that a company is not efficiently managing its own money or that the firm has few opportunities for growth.

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