Financial Risk
Short definition
Financial risk is how the funding structure (debt, rate type, tenor, covenants) turns operating-cash volatility into default, dilution or lost flexibility. It sits on top of operating risk.
Detailed explanation
Channels: interest cover, principal, refinancing, covenants, liquidity and FX/rate mismatch. DFL is only the EBIT–EPS channel; the maturity wall and collateral do not appear in DFL.
The same net debt/EBITDA is different financial risk on long fixed rates versus short floating. Sovereign risk and credit conditions tie this layer to macro.
Why it matters for the CFO
An ROE story sells financial risk as “cheap debt”; in a stress year the same debt turns ROE negative.
How to read it
Read ICR, DSCR, the maturity wall and covenant headroom together. One ratio does not exhaust financial risk. The same leverage is dearer when operating risk is high.
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What to learn next
Definitions are educational. They are not investment, credit or tax advice.