FIN 320 4-2 Case Study Assessing Financial Risks and Sales Growth - Roleshia Bickham
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Roleshia Bickham
Southern New Hampshire University
FIN-320 4-2 Case Study: Assessing Financial Risks and Sales Growth
Alex Merrill
July 23, 2023
Risk is defined as “the chance that an outcome or investment’s actual gains will differ from an expected outcome or return” (Chen, 2023). There is a possibility of losing some or all your investment when risk is involved. When reviewing a company’s financial health, you must consider the risk. Two forms of risk are systematic and unsystematic. Systematic risk refers to “the risk inherent to the entire market or market segment” (Chen, 2023a). This type of risk is difficult to avoid. “It is a risk that impacts the entire market or
a large sector of the market not just a single stock or industry, for example, a natural disaster, weather events, changes in interest rates, war, and terrorism” (
Systematic Risk: What Investors Need to Know
, 2023). Unsystematic risk is defined as “the risk that is unique to a specific company or industry”
(Chen, 2023a). An example of unsystematic are new competitors, product recall, shifts in management, and regulatory change. For instance, Mcdonald's and Burger King are two companies in the fast-food industry that have similar menus which could have one or the other to
be at an unsystematic risk. Financial Risk is “the possibility of losing money on an investment or business ventures. It is a type of danger that can result in the loss of capital to interested parties” (Hayes, 2023). There are several types of risk associated with financial risk and a few of those are interest rate risk, economic risk, credit risk, and operational risk. Interest rate risk is “the potential that a change in overall interest rates will reduce the value of a bond or other fixed-rate investment” (Chen, 2022). As for Mcdonald's, if the rate rises, the company will have a harder time selling its
bonds.
Economic risk refers to “the potential for adverse changes in economic conditions that can negatively impact a company or investment” (Cain, 2021). The impact of the rise of unemployment and recession could cause the company to suffer, for example, the COVID Pandemic. Credit risk refers to “the probability of a financial loss resulting from a borrower’s failure to repay a loan” (Team, 2023). The higher the credit risk, the higher the interest rates they
may be charged on loans. Changes in market conditions are one of the causes of credit risk. Operational risk refers to “the risk of loss as a result of an ineffective or failed internal process” (
A Complete Overview of Operational Risk Management
, 2023). This risk is associated with the company employees and the decisions that are made by them, human error. Anticipating
this risk before it arises can make this risk manageable.
Higher growth in sales will create the potential for greater profit. Lower growth impact in
sales means the company is not generating enough revenue which is causing the dividend payments to not be covered. Higher growth impact leads to making the company more profitable and increasing its market. Based on the March 2023 quarterly report for McDonald’s, shows a profit which was an increase compared to its March 2022 quarterly statements. There are no signs of financial risk.
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Reference
A complete overview of operational risk management
. (2023, April 27). AuditBoard. https://www.auditboard.com/blog/operational-risk-management/#:~:text=Operational
%20risk%20is%20the%20risk,the%20flow%20of%20business%20operations
.
Cain, S. L. (2021). What is economic risk? investinganswers.com
. https://investinganswers.com/dictionary/e/economic-risk
Chen, J. (2022). Interest rate risk definition and impact on bond prices. Investopedia
. https://www.investopedia.com/terms/i/interestraterisk.asp#:~:text=Interest%20rate
%20risk%20is%20the%20potential%20that%20a%20change%20in,rates%20of%20new
%20bond%20issues
.
Chen, J. (2023). Risk: What It Means in Investing, How to Measure and Manage It. Investopedia
. https://www.investopedia.com/terms/r/risk.asp
Chen, J. (2023a). Systematic Risk: Definition and Examples. Investopedia
. https://www.investopedia.com/terms/s/systematicrisk.asp#:~:text=Investopedia%20%2F
%20Julie%20Bang-,What%20Is%20Systematic%20Risk%3F,a%20particular%20stock
%20or%20industry
.
Chen, J. (2023a). What is unsystematic risk? Types and measurements explained. Investopedia
. https://www.investopedia.com/terms/u/unsystematicrisk.asp
Hayes, A. (2023). Understanding financial risk, plus tools to control it. Investopedia
. https://www.investopedia.com/terms/f/financialrisk.asp#:~:text=Financial%20risk%20is
%20the%20possibility,of%20capital%20to%20interested%20parties
.
Systematic risk: What investors need to know
. (2023, February 2). https://smartasset.com/investing/systematic-risk
Team, I. (2023). Credit Risk: Definition, role of ratings, and examples. Investopedia
. https://www.investopedia.com/terms/c/creditrisk.asp#:~:text=Investopedia%20%2F
%20Theresa%20Chiechi-,What%20Is%20Credit%20Risk%3F,and%20increased
%20costs%20for%20collection
.
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