Canadian Securities Course (CSC) Level 2 Practice Exam

What is the primary focus of risk analysis in company evaluation?

1. Assessing market speculation potential

2. Evaluating short-term sales fluctuations

3. Examining liquidity trends

4. Assessing debt levels and coverage ratios

The correct answer is: Assessing debt levels and coverage ratios

The primary focus of risk analysis in company evaluation is centered on assessing debt levels and coverage ratios. This approach enables analysts to understand how much debt a company carries relative to its earnings and assets, which is crucial in determining the company's financial stability and risk profile. By examining coverage ratios, such as interest coverage and debt-to-equity ratios, analysts can identify how well a company can meet its debt obligations and endure adverse economic conditions. This forms a key component of overall risk assessment, as high debt levels with low coverage ratios may indicate a higher likelihood of default, affecting the firm's valuation and investment attractiveness. In contrast, focusing solely on market speculation potential, short-term sales fluctuations, or liquidity trends might not provide a comprehensive view of the company's financial health and underlying risks, which are paramount when evaluating long-term sustainability and risk exposure.