Financial Risk : - Financial
Risk refers to the risk of the company not able to cover its fixed
financial cost. Fixed financial cost includes payment of interest that is to be
paid whether the company can make profit or not. Degree of financial leverage
measures the degree of financial risk. If the degree of financial leverage is
high then the firm has more financial risk. If EBIT (Earnings before interest
and tax) decreases, financial risk increases because the firm may not be in a
position to pay its interest obligations.
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