Financial risk refers to the extra risk borne by stockholders 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 risk that stockholders face due to a firm's use of debt. By using debt, a firm increases its financial leverage, which in turn increases the financial risk for stockholders. If the firm's profits decline, it may become difficult for the company to meet its debt obligations, which increases the risk that stockholders will lose their investment. Therefore, financial risk is higher for companies that use more debt in their capital structure.

Financial Risk Refers to the Extra Risk Borne by Stockholders