Step 10 of 11
How to think about risks
What could go wrong, and how much would it matter?
Click any Tap any word with a dotted underline to see what it means.
After looking at what a company has done, it helps to think about what could change. Every company faces risks: some come from its own business, others from the economy and the world around it. Thinking about them in advance makes surprises easier to understand.
What to look at
- The "Risk Factors" section of the , where the company lists what could hurt its business.
- that will need to be repaid or refinanced, especially when interest rates are high.
- Dependence on one product, customer, supplier or country.
- Competition, new technology and changes in regulation.
- Sensitivity to the economy: some businesses sell much less in a , others are steadier.
Questions to ask yourself
- What are the two or three things that could change this company's results the most?
- Could the company get through a bad year or two? How much cash and debt does it have?
- Is the risk already widely known, or would it come as a surprise?
Keep in mind
The Risk Factors section lists many possibilities, often in long legal language, and they are not all equally likely. No list covers everything: some of the biggest surprises are ones nobody saw coming, as explained in Uncertainty.
On StockLab
StockLab doesn't give companies a risk score. The Cash vs. Debt card, free cash flow over five years and in the Advanced View show some of the facts related to risk.