Explore the factors that influence a company's business risk, including country risk, industry dynamics, company position, and profitability analysis.
Business risk refers to the company's ability to generate sufficient revenue to cover its operational expenses. To evaluate business risk we would look into:
- Country risk
- Industry dynamics
- Company position
- Profitability/peer group analysis
If the company’s operations are mainly located in one country the sovereign will normally be the ceiling rating.
Industry Dynamics:
- Competition
- Substitution risk—Porter’s threat of substitutes definition is the availability of a product that the consumer can purchase instead of the industry’s product. A substitute product is a product from another industry that offers similar benefits to the consumer as the product produced by the firms within the industry. According to Porter’s 5 Forces, the threat of substitutes shapes the competitive structure of an industry.
- Technological change – especially no when the technology is improving with such a great speed and the companies have to keep up to be on top of it
- Regulatory change may affect industry dynamics
- Cyclicality—Cyclical risk is the risk of business cycles or other economic cycles adversely affecting an individual company's profits.
- Barriers to entry—factors that can prevent newcomers into a market or industry sector, and so limit competition. These can include high start-up costs, regulatory hurdles, or other obstacles that prevent new competitors from easily entering a business sector.
Company Position:
- Diversity of products is important, so clients have different options
- The price setter reflects a company’s position as a luxury, premium, or mass-market brand. And also shows how competitive the prices are.
- Product quality is also very important
- Execution – how effective is the execution strategy of the company. It’s easy to come up with great ideas, the right implementation is the key
- Management quality reflects the company position as it’s a part of the brand and execution strategy for the company.
- The market share shows how penetrated the company is within its industry.
The combination of all factors mentioned above gives us a good idea of where the company stands in terms of business risk, and as a result – in terms of credit rating for the company.