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Value Investment and Mindset

What are the Four Main Risks for Your Company ?

In the previous topic of “How to Pick Good Stocks as a Value Investor?” We discussed the company's risks. Let’s now discuss in detail the four main risks of a company. Make sure to calculate the risks before investing into any company.

🟠Regulatory Risk

It is a risk that a change in regulations or legislation will affect a company or industry.
Companies must abide by regulations set by governing bodies that oversee their industry.

(Thus, any change in regulations can cause a ripple effect across an industry.)

Any change in regulations can increase the cost of operations, introduce legal and administrative hurdles, and restrict a company from doing business.

Example: Aviation (in COVID travel was banned and that regulation risk affects businesses), Military, and Defense Industry

Alibaba Group has regulatory risk due to the possibility of trade wars reoccurring once again, and of course, China anti-monopoly regulations that restrict Alibaba growth might need to be considered as well.

🟠Inflation Risk

Inflation means the decline in the purchasing power of a given currency over time. The same amount of money that you have today will have a different value 5 years from now.
Companies that have inflation risk usually do not have the pricing power to increase the price they charge their customers with inflation.

With inflation, the price of goods and services will normally increase due to an increase in output costs, which are either passed on to customers, resulting in fewer units purchased for a certain price, or reduced to quantity at the same price in cases where cost can be passed.

It results in downward pressure on the profit margins of the business, which means the business will earn less. Inflation risk will also result in higher borrowing costs for businesses, as lenders need to be compensated not just for the risk of lending but for additional costs that stem from the falling real value of money in the future compared to the present.

Example: Commodity Industry

🟠Innovation and Technology Risk

It is self-explanatory; this type of risk is commonly found in technology companies, where we need to closely monitor the company to see if they have constant innovation in their technology or how competitive their technologies will be compared to other companies.
Since in the current generation, technologies change quickly, businesses might fall behind if they do not have a competitive advantage in terms of research and technology development.
Tech companies have the risk of not being competitive enough with their technologies.

Example: Every single technology company. So we can only keep track of company development in terms of product research. For instance, whether Meta (formerly known as Facebook) created their AI model, llama, is better than Google's AI model or Microsoft's AI or How efficiently are they using it?

🟠Key Person Risk

It is a risk to business operations if one of the critical members or employees is out for any extended period of time and for any reason.
It matters for companies that concentrate much of their business growth solely on individuals.

Example: The CEO of Tesla, Elon Musk (the branding element of Tesla), has a higher contribution of Tesla.

Conclusion: Consider the risks of the company and before making any investment do some research and take calculated risks based upon your research.

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Last Updated: Aug 28, 2024

Tags: #riskofcompany #investment #risks #stocksrisk #investmentrisk #risksininvesting #financerisk #finance #company #stocks #technology #innovation #inflation #regulation #keyperson Category: Finance & Investment Learning Lifestyle