What does financial risk primarily concern?

Financial risk primarily concerns the uncertainty of returns caused by the use of debt. Utilizing debt introduces additional risk because it requires the borrower to make fixed payments regardless of their income or returns on investments. If the investments funded by the debt do not perform as expected, the entity or individual still faces the obligation to repay that debt, which can lead to financial distress or even insolvency.

In essence, leveraging increases potential returns but also heightens the risk of loss, making it a central focus in the context of financial risk. This is particularly relevant in capital-intensive industries where businesses often rely heavily on borrowed funds to finance operations and growth. Understanding this dynamic is crucial for making informed investment decisions and managing overall financial health.