Corporate Issuers – Leverage

1. Sales Risk: This refers to the uncertainty associated with the number of units produced and sold and the prices at which they are sold. If two companies have identical unit sales volume, it means that their sales risk would be the same because they are selling the same number of units at the same price.
2. Operating Risk: Operating risk relates to the cost structure and the variability of operating earnings due to changes in production and operating expenses. If the two companies have identical unit sales volume and operating risk, it means that they have similar cost structures and operating expenses, resulting in similar operating risk.
3. Business Risk: Business risk is a broader concept that encompasses both sales risk and operating risk. It is the overall risk associated with a company’s operations, taking into account factors like competition, market conditions, and the overall business environment. If the two companies have identical unit sales volume and operating risk, it suggests that their business risk could also be similar, assuming that other external factors are the same for both companies.

In your explanation, you mentioned that “both companies have the same operating risk and identical sales units, sales units are also the same, therefore, sales risk is also the same; therefore, business risk is also the same.” This is generally correct. However, you don’t need to make the assumption that sales risk is the same because sales risk is only one component of business risk. Business risk is a combination of various factors, including sales risk and operating risk, as well as other external factors.