Measuring A Companies Risk

One issue that a lot of investors are having, is the fact that it can sometimes be difficult to measure the risk a company is exposed to if they are especially large. Many large companies such as GE have diverse businesses in multiple sectors, so it can be sometimes impossible to measure risk effectively. The consolidated financial statements for such firms don’t really fit any neat industry category. More generally,the kind of peer group analysis we have been describing is going to work best when the firms are strictly in the same line of business, the industry is competitive, and there is only one way of operating.  Besides investors, even enrolled agents can sometimes have difficulties advising such companies, due to the number of companies that they operate and different regulations.

Another problem that is becoming increasingly common is that major competitors and natural peer group members in an industry may be scattered around the globe. The automobile industry is an obvious example. The problem here is that financial statements

from outside the United States do not necessarily conform to GAAP. The existence of different standards and procedures makes it difficult to compare financial statements across national borders.  Besides that working conditions can very quite a lot in various countries and what is considered alright in one country, may not be permissible in another.