Has corporate financial analysis been too focussed on past financial performance rather than an assessment of risks facing businesses?  Are we living at a time of increasing numbers of extreme risks that have been underestimated? How will recent extreme events impact the pricing of risk and potential losses in corporate insolvencies?

The video in this post on the importance of qualitative risk analysis as part of a corporate financial analysis was filmed pre COVID-19. We are sadly witnessing the devastating affects of COVID-19 on peoples’ physical, mental and financial well being.

This is in addition to

  • The massive adverse impact of COVID-19 on a number of business sectors
  • Rapid disruptive changes as a result of technology
  • Environmental protection and the impact on energy consumption and prices
  • Social change and how it is positively affecting our attitudes to human rights and social injustices
  • Trade wars
  • Political tensions
  • Concerns about cyber security
  • Inadequate risk controls leading to events such as environmental pollution, large cost overruns on major infrastructure projects, collapsing bridges, floods in mines, fines for alleged distortion of vehicle emission tests

Corporate financial analysis has traditionally been largely focussed on the analysis of financial performance, but at this time of rapid and disruptive change more attention is needed on evaluating the business environment, systemic and operational risks and management’s ability to manage those risks and react quickly to change. The expression “this time it’s different” is often used but it is clear that we are facing more extreme risks, more frequently, and more rapid change.

In financing businesses, whether by debt or equity, rapid and deep disruption will most likely result in potential for major and rapid changes in the financial position of companies with implications for risk and return decisions, corporate capital structuring, finance conditions and corporate defaults.

There will, of course, always be opportunities arising from change but are we entering a period when losses given default / investment losses following corporate restructurings / failures will be larger, and more widespread, than in previous economic cycles?

I would welcome your comments.