There is no single number that represents a company’s risk-bearing capacity. A risk-bearing capacity analysis looks at these five dimensions individually and in interaction with one another to provide both qualitative and quantitative indicators of overall capacity, as well as currently employed and identified reserve capacity.
- – An aggregation of the firm’s financial measures and ratios such as cash flow at risk and debt equity. Traditional solvency parameters include leverage, credit rating, cash generation capabilities, trading multiples, earnings strength and diversification.
Management capacity – An evaluation of management processes and how they are employed to add value to the shareholder; a blend of credit rating, investment analysis and corporate governance analysis. Management capacity also covers leadership’s strategy execution and crisis resolution.
Competitive dynamics – Refers broadly to a company’s position in the marketplace relative to competitors and market trends.
Operational flexibility – Ability to react to market trends and developments while still maintaining strategic focus and financial continuity. Operational flexibility includes components such as production line switchability or alternative supply chain sourcing capabilities.
Risk management systems – Risk management systems include the people, technology, systems and processes that a company employs to identify, measure, mitigate and monitor its risk exposures and protect its solvency and stability. The protective dimension includes disaster recovery, business continuity planning and crisis management planning.
This article originally appeared in Outlook, an Accenture publication. Copyright 2010 Accenture. All rights reserved. Condensed and reprinted by permission.