Risk Analysis

How to Use TipRanks’ Risk Charts and Graphs in Your Investment Strategy

While studying a company’s fundamentals, it is essential to look at the risks associated with the stock. Investors often ignore this very important aspect when making an investment decision. A stock’s risks can fall into several categories, such as company-specific or industry-specific, as well as those related to the country-specific macroeconomic factors in which the company conducts business. These risks are listed in the quarterly and annual regulatory filings (10Q/10K), which publicly listed companies are required to submit to the Securities and Exchange Commission (SEC).  

For an investor, it is both tedious and difficult to go through the “Risk Factors” section of the SEC filings. Don’t worry, TipRanks has a solution for the problem. Our artificial intelligence (AI)-designed mechanism scans all publicly available documents to extract the risk factors and displays them under one simple tool – Risk Analysis. To navigate to this page, go to the stock page that you are studying. On the left panel bar, go to Stock Analysis. Scroll down the page and you will find the Risk Analysis tool. Click on Detailed Risk Analysis to study about the company’s risk factors. On this page, you will find several risk-related charts including Risk Overview, Risk Change Over Time, Risk Highlights, and Risk Factors Full Breakdown. 

Risk Overview – This graph shows the Risk Distribution for the latest reported quarter. TipRanks breaks down the risk into six broad categories. These risk categories include Legal & Regulatory, Ability to Sell, Production, Macro & Political, Finance & Corporate, and Tech & Innovation. From the breakdown of the risks, you can gauge which risk is the most sensitive for the stock. These risks will be largely driven by the company’s nature of business. For instance, for a consumer goods company or a retailer, risks related to the Ability to Sell may be the most significant, along with the Production risks. Meanwhile, for a financial institution, the Finance & Corporate risks could loom largest.  

Alongside the Risk Overview, you will find a bar graph showing the risk distribution as compared to the Sector Average. The graph shows if the stock’s risk is Higher or Lower compared to the sector average. This enables you to understand if a stock is more prone to a specific risk compared to its peers and allows you to make an apt investment decision. 

As you scroll down the page, you will see the Risk Change Over Time graph, which shows the quarterly risk disclosure for the stock. This chart shows the number of risks a company has disclosed in the various quarters. At a glance, you can see how many risks were removed, added, or changed over the past several quarters. Below the chart, you will also see the details of the risks newly added, changed, or removed in the chosen quarter. These details are sourced directly from the quarterly/annual SEC filings of the company.  

Further down on the page, you will see a section of Risk Highlights, which briefly shows the Main Risk Category in the latest quarter, the Number of Disclosed Risks, Recent Changes in Risks, and the Number of Risks Changed in the quarter. Adjacent to this information, you will find the Risk Word Cloud, which displays the most commonly used phrases about risk factors from the most recent report. Larger texts indicate more widely used phrases.    

And finally, at the bottom of the page, you will see a table of the Risk Factors Full Breakdown, according to the category and subcategory. The list starts with the category in which the company holds the highest risk. Click on sub-categories to read relevant extracts from the most recent report. The table also displays the percentage of each type of risk’s contribution to total risks as well as whether the extent of risk is Below/Above Sector Average. 

How to Understand TipRanks’ “Risk Change Over Time” Chart

Now that you are aware of the importance of studying a stock’s risk factors, it is time to introduce one of TipRanks’ unique charts, the Risk Change Over Time. The chart shows the change in the quarterly risk disclosures for the company, along with the number of risks the company has disclosed in the various quarters. From a dropdown bar, you can choose for which Fiscal year and quarter you wish to see the data. When you hover over the line graph for a particular quarter, you will see the Report Type from which the information was sourced, the date when the filing was Reported, and the Period Ending, which tells you which quarter the chart refers to. Additionally, you will see the Total Risks Disclosed, newer Risks Added (maroon), the number of Risks Removed (green), and the number of Risks Changed (yellow). The trend in the graph can also help you understand if the stock’s risks are increasing or decreasing. 

To further understand the nature of risks that changed in the quarter, you can study the details given right below the graph. The word section gives in detail the risks added, removed, or changed during the quarter. When you click on any of the subsections, you can read the detailed paragraphs on Risk Factors from the relevant regulatory filings.   

Interestingly, for the Risks Changed subsection, you also have the option to see the Old Text, and New Text of the associated risks, as well as See Changes between both the old and new risk details highlighted in green.  

For instance, Apple added a few more factors to its Production risk in the third quarter of Fiscal 2022. In the Q2FY23 filing, Apple stated the section as follows: The Company’s success depends largely on the continued service and availability of highly skilled employees, including key personnel. 

But in the Q3FY23 filing, Apple added a few more factors (in green) to the same risk, as follows:  

The Company’s success depends largely on the talents and efforts of its team members, the continued service and availability of highly skilled employees, including key personnel, and the Company’s ability to nurture its distinctive and inclusive culture. 

Similarly, in Tesla’s (NASDAQ:TSLA) Q4FY22 filing, the company changed a few words (words canceled indicated in red color) and replaced them with new words (words added indicated in green color) under its Production risk, as follows: 

We may experience issues with lithium-ion cells or other components manufactured at Gigafactory our Nevada and Gigafactory Shanghai Gigafactories, which may harm the production and profitability of our vehicle and energy storage products. 

By reading the Risks Changed Over Time section, you can analyze how a stock’s risks are changing along with modifications in the company’s business operations, legal environment, or macro factors. An in-depth study of the changing risk factors allows you to make appropriate buy/sell calls on the stock.