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Post-COVID-19, Business Risk Assessments Look Different for Investors

When conducting a business risk assessment, investors dig deeply into a company’s inner workings to predict whether it will be successful in the future. Historically, the most important indicators of success were stability of earnings and growth potential — but that’s changed post-pandemic. Now, businesses must demonstrate that they can adapt on the fly.

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When assessing company risk, business investors aim to get a 360-degree look at a company and its inner workings. The goal is to determine how likely the business is to be successful in the future. For those reasons, business risk assessments have historically included the evaluation of factors like shareholder returns, earnings growth, operational strength, and many more.

However, business risk assessments look markedly different today than they did prior to COVID-19. The past year and a half-raised a lot of questions about what it takes for businesses to not only survive but thrive in the long term. So, investors are asking how companies responded to the pandemic-induced economic shutdown.

As Deloitte pointed out, the volatile, uncertain, complex, and ambiguous environment that occurred as a result of COVID-19 exposed a number of problems with risk assessment best practices. For instance, a business risk assessment is still perceived as a function of compliance when, in reality, it’s a far more dynamic issue. Companies had to fight to stay afloat during the pandemic by reengineering supply chains, consolidating services, forming creative partnerships, and more. The way businesses handled these challenges helps investors see their strength and potential.

New Risk Considerations for Investors

The two most important considerations during a company risk assessment are the stability of earnings and the likelihood of growth. That’s why investors are assessing companies’ resiliency in the wake of the pandemic: It tells them how reasonable it is to assume that future performance will be as good or better than past performance.

As the world moves into the post-COVID-19 era, what will investors need to evaluate next? Here are two of the biggest risks to keep an eye on before investing:

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1. Significant Labor Market Changes

Wages have increased across the board for employers, which has a large impact on all businesses. Even if a particular company hasn’t increased its wages, it is likely that its suppliers have.

To compensate for these wage hikes, businesses are increasing prices. Consumer prices were 5.4% higher in July than a year ago, according to the Labor Department. For instance, Chipotle (NYSE: CMG) raised its average pay to $15 per hour this summer and increased menu prices between 3.5% to 4% to make up for the bump.

Because of this complexity, investors can’t simply ignore poor performance during COVID-19. They have to take a hard look at how margins and revenue were impacted in the long term.

2. The Impact of Supply Chain Disruption

With cargo ships trapped at harbors and global supply chains experiencing bottlenecks, the world has seen massive supply chain disruption because of the pandemic. And the effects have spread like wildfire. Almost every industry is experiencing delays, and with these delays come significant price increases.

According to EY, 60% of executives say the pandemic has increased their supply chain’s strategic importance. This goes back to the fact that supplies and materials have longer lead times, and there is generally less predictably in supply. It is critical that investors evaluate businesses’ plans to design supply chains that work in the peri-pandemic world.

The Future of Company Risk Assessment

When it comes to the future of company risk assessment, it’s clear that investors are placing more emphasis on flexibility and robustness in planning. Resilience and adaptability in the face of crisis indicate success. That’s why investors can no longer simply look at earnings numbers. Rather, they need to carefully examine how companies responded to and bounced back from the pandemic.

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(Featured image by Scott Graham via Unsplash)

DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.

This article may include forward-looking statements. These forward-looking statements generally are identified by the words “believe,” “project,” “estimate,” “become,” “plan,” “will,” and similar expressions. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed in the following cautionary statements and elsewhere in this article and on this site. Although the Company may believe that its expectations are based on reasonable assumptions, the actual results that the Company may achieve may differ materially from any forward-looking statements, which reflect the opinions of the management of the Company only as of the date hereof. Additionally, please make sure to read these important disclosures.

Nick McLean is a founder and partner of Four Pillars Investors, an investment company that purchases and operates middle-market businesses that have an untapped potential for growth.