Business risk
Principles of Finance glossary · Cost of Capital & Capital Structure
Definition
Variability in operating income arising from the nature of the firm's business and operating leverage.
Business risk in plain English
Business risk is the danger that a company's core profits (its "operating income" — sales minus the day-to-day costs of running the business) will swing up and down, purely because of the kind of business it is. A ski resort or a fireworks seller has high business risk because demand is seasonal and unpredictable, while a company selling bottled water has steadier profits. It also grows when a firm has lots of fixed costs it must pay no matter what ("operating leverage") — like rent on a huge factory — because when sales dip, those bills don't shrink, so profits fall hard. Note this is about the business itself, before you even think about any money the company borrowed.
Learn these first
Related Principles of Finance terms
Principles of Finance practice questions · Principles of Finance flashcards · Principles of Finance study guide