It's important for investors to recognise that while companies can enjoy great success, there are also numerous risks that could cause them to lose money or see businesses decline dramatically. Fear of negative outcomes can limit the upside potential for shares, or even cause declines.
1) Operating risks
There are many possible problems that a company may face as a part of normal business, including machinery breaking down, the entry of new competitors, price wars, input cost increases, adverse economic conditions, lost contracts or customers and more.
2) Political risk
This varies by country but relates to the potential that a new government could gain power and implement adverse economic policies such as tax increases, new regulations, asset nationalisations, and other initiatives.
3) Currency risk
Companies operating in multiple countries run the risk that increases and decreases in currencies relative to each other could impact the company's revenues or cost structure and may increase or reduce the earnings power of foreign operations in terms of the home currency.
4) Legal risk
This relates to the possibility that the company could be sued. This particularly appears in sectors where there can be disputes over patents and intellectual property which could lead to significant damage awards or injunctions against doing business.
5) Insolvency risk
In difficult times, companies with high debt levels can find themselves unable to meet their obligations to have enough financing to meet their day to day obligations. To determine the financial strength of a company, there are a number of ratios that an investor can analyse. These include: