Financial risk refers to the extra risk stockholders bear as a result of a firm's use of debt as compared with their risk if the firm had used no debt.

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Financial risk is the additional risk that shareholders face due to a company's use of debt financing. When a company uses debt to finance its operations, it has a greater financial risk than if it had used only equity financing. Debt usually comes with fixed interest payments that the company must make regardless of how well it is performing. This means that if a company experiences financial difficulties and cannot make its debt payments, it can face bankruptcy. This creates additional risk for the shareholders who have invested in the company, as their value could be significantly reduced or even erased.

Financial Risk Refers to the Extra Risk Stockholders Bear as a Result