Financial risk and management in agriculture
2004
Lemsalu, K. (Estonian Agricultural Univ., Tartu (Estonia))
Traditional business risk occurs as unanticipated variations in agricultural production and commodity and resource prices. These business risks, combined with financial risks, are attributed to borrowing and leasing. In general, business and financial risks complicate financial management. The financial management of the business involves the acquisition and use of financial resources and the protection of financial capital from various sources of risk. Conceptual models are developed that relate a risk and firm's profitability to leverage and other business characteristics. Numerical examples demonstrate that under proper conditions higher leverage can accelerate the growth rate of profitability, but it also increases the risk of loss of profitability. The aim of the present paper is to evaluate the risk managers meet making decisions in agricultural companies, and to give advice how to manage risks. Results of this research work show the link between financial leverage and financial risk, and also show that farmers have to manage financial risk otherwise probability of loss due to high risk, is too high.
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