Business risk seems like such a generic term. In the world of business, however, it is not a generic term at all. Business risk refers to the variability of a business firm's income. Variability of income can be traced directly back to variability in sales, so when we see a downturn in the economy and sales drop, some businesses suffer more than others with regard to changes in their net income. This is business risk.
Business risk varies by industry and market segment. It also varies by individual company. We do have tools we can use to calculate a firm's business risk. These tools are very valuable to business owners and financial managers and they are also very valuable to a firm's investors. Here are four financial ratios that will help you determine the business risk of a company.