Methodology

Risk Factors

Credit Risk

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.

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.

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.

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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