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Risk Appetite, Tolerance and RBC. What do they mean?. Is it all the same?. Risk Appetite Risk Tolerance Risk Bearing Capacity. What is it?. Risk Appetite Propensity to take risk Risk Tolerance Ability to take risk Risk Bearing Capacity Absolute financial measure to survive risk. - PowerPoint PPT Presentation
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Risk Appetite, Tolerance and RBCWhat do they mean?
Is it all the same?Risk Appetite
Risk Tolerance
Risk Bearing Capacity
What is it?Risk AppetitePropensity to take risk
Risk ToleranceAbility to take risk
Risk Bearing CapacityAbsolute financial measure to survive risk
Risk AppetiteTotally subjectiveBased on perceptionsPersonalMay be measurable or notMay change very regularly as environment changes
Risk ToleranceStill SubjectiveMeasurableCriteria need to be identifiedCriteria need to be agreedMust take note of business dynamics
Risk ToleranceMeasured in terms of deviation from business objectivesPrioritised according to criticality to companyBoth upside and downside are identified and measured (each with own identity) KPIs
Risk Tolerance DimensionsEnterpriseBusiness unitRegionProduct lineBrandCustomer
Risk Tolerance DimensionsTimeRisk typeChange ValueOutcomeObjective
Risk Tolerance DimensionsRewardInterestAssetValueActionChange AgentsInfluence
Risk Tolerance DimensionsTimeProbabilityPositionInformation
RewardStrategic goalsFinancial targetsProduction targetsMarketing & sales targetsOrganisational objectivesBusiness objectives
InterestShareownersSuppliersCustomersEmployeesAuthoritiesCommunitiesBusiness PartnersIndustry Bodies
AssetsDynamic assetsValue based assetsLegal assetsHuman assetsPhysical assetsProduct based assetsIntellectual assetsFinancial assetsStatic assets
ValueFinancial valueStrategic valueCompetitive valueTime valueReplacement value
ActionIncoming corporate actionsCorporate financial actionsCorporate process actions
Change AgentsCompetitive FinancialFiscalOperationalIntellectualLegal
Change AgentsReputationSocialHumanEnvironmentalNaturalTechnologicalPolitical
InfluenceAccumulationAggregationArbitrageBackgroundComplexityCorrelationCriticalityCyclesDependency
Influence
DiversificationDurationInterdependencyLiquidityProximityReliabilityToleranceVolatilityVulnerability
TimeCyclical factorsSeasonal factorsTimingRegional cyclesDurationSimultaneity
ProbabilityLikelihoodStatistical probabilityCorrelationVolatilityAggregationTimingRelative frequency
PositionFlexibilityLiquidityCrisis responseContingenciesControl/influence
InformationValue at riskEarnings at riskCash flow at riskYield curvesRisk capitalStability ratiosLiquidity ratios
Some examples% of Revenue% of EBITDA% of Adjustable earnings% of Debt Service cover headroom% Leverage
Some examplesEmployee safetyStaff TurnoverManagement turnoverEnvironmental incidentsMachinery breakdown incidentsEthics (fraud, bribery incidents)Training as % of RevenueEmployee engagement scoresAverage machinery ageR+D spend as % of turnover
Risk Bearing CapacityDefinition:RBC is a prediction of the enterprises ability to endure losses and the effect such losses may have on the enterprises value and /or its ability to continue with its activitiesRBC is a monetary value which is used as a yardstick, measuring the maximum loss the enterprise can endure, without exposing it to the point where its existence and survival is under threat, given an equivalent loss.
RBC MethodologiesNet Working CapitalNet Working capital = Current Assets Current Liabilities
25%
RBC MethodologiesQuick Asset ValueQuick Asset Value = Current Assets Inventory
Quick assets = trade debtors +bank account25%
RBC MethodologiesCoverage RatioCoverage ratio : Times-interest-earned ratioHow many times the enterprises operating income covers its debt-service chargesT-I-c-v= earnings before interest and tax interest expenses10%
RBC MethodologiesAnnual Cash Flow Generated
Annual Cash flow Value = Annual cash flow-interest paid annually on long term debt10%
RBC MethodologiesSurplus Cash
Surplus cash (free cash) = after ops activities, interest, taxes, dividends and before investment
10%
RBC MethodologiesTotal sales
Total sales from income statement
5%
RBC MethodologiesNet Income
Net Income = Profits after tax and interest
10%
RBC MethodologiesRetained Earnings
Earnings after dividends
10%
RBC MethodologiesFixed Assets
Total value of Fixed Assets
5%
RBC MethodologiesDistributable Reserves
= Accumulation of profits retained and reinvested
10%
Risk Tolerance ValuePick a selection of RBC valuesSome may be negative or not applicable at allSelect as many as possibleCalculate the Average