Risk Measurement Techniques Essay

786 Words Mar 28th, 2015 4 Pages
Risk Measurement Techniques
FIN/415 Corporate Risk Management

Business risk measurement is a process in which a company will try to determine what risks the business faces for each part of its operations. There are several different methods to measure risk for a company, the main goal is to better understand whether or not it is worth it to invest money in that particular area. After proceeding with due diligence and the potential profits out way the potential loss the company will proceed to make the investment. The earnings volatility method is where the potential earnings are measured against expected and unexpected losses. The idea is to identify the potential risks so a company can be well prepared to combat
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Leverage can also help identify issues that can lead to a firm’s demise. The availability of debt and the current interest level are external environmental risk factors that appear in leverage ratios. A company’s use of debt and the mix of equity and debt in its capital structure are internal risk factors. How much a company can leverage to its debt is a tell tail sign of their health. Profits and positive cash flow is what drives firms to have a long and profitable life. Profitability ratios compare income statements to the total sales. This can help identify some inventory problems they may have. Inventory turnover points to external problems, including market demand and supply and sourcing disruptions. It can also point to other internal risk factors that include marketing effectiveness. The rate of return are yet another ratio that show how well a company is performing operationally. Capital raising has an effect on this on this ratio. The easier it is to raise capital from external sources the more likely a company will pursue that option over debt or slower growth. Additional risks include a company’s operating or competitive environment, its procedure and management capabilities. The Monte Carlo technique or simulation allows for an individual or firm to account for risk in a quantitative analysis decision making. This simulation furnishes the decision maker with a range of possible outcomes and the probabilities that will occur for

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