What is the return on capital adapted to the risk?

The return on capital of the adapted risk concerns the financial ratio that companies use to determine the effects of the interplay between the risk and return on the value of shareholders. In other words, it measures the return on investment taking into account the risks of investment. Financial experts use the ratio to evaluate projects or investments that have a high risk level for the amount of capital involved. This ratio allows them to compare investments with different risk profiles. Over the years, the use of the ratio has been expanded and most commercial banks and some department stores now use a ratio or its variation. Non -banking companies also use the ratio to measure the impact of credit, market and operational risk.R wealth. From a mathematical point of view, it can be expressed as a net income divided by capital modified for maximum potential loss. A high ratio could be due to a high return, low capital or low risk. HoweverAhrins complex estimates. The numbers in calculations often fluctuate and are difficult to predict, for example, when measuring alpha and beta shares.

Different companies from different sectors can adjust the return on capital adapted to the risk to incorporate the unique features of each company, such as the business model and projection of cash flows. Another advantage of this ratio is that it can include different types of risks in a single frame so that managers can better understand how the relationship between different risks affects the lower limit. In addition, this More ratio is useful than financial reports based on accountants, such as balance sheets or profit and loss statements because it supports a long -term view of risk and return.

To use the ratio effectively, the company needs a risk management department that monitors and controls the risks that the company is doing. Risk managers collect risks data, analyze and diskThey put on its consequences with business managers. The company can set a limit of risk that is willing to undergo risk managers quickly to alleviate the risk when the return on capital adapted to the risk falls below the limit.