What is Financial Risk

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.