Assessment of Free Risk Capacity under Liquidity Considerations in International Companies

The transformation of entire industries, global crises, and increasingly detailed legal requirements and auditing standards for risk control require companies to know and analyze their free risk-bearing capacity. Free risk-bearing capacity is the maximum amount of risk that a company can bear without endangering its continued existence. However, companies lack scientific approaches for the practical fulfillment of these requirements. The objective of this paper is to develop and apply a practicable concept that enables companies to obtain a picture of their free risk-bearing capacity that can satisfy legal requirements. We focus on corporate liquidity and present two variants for deriving free risk-bearing capacity and calculating the probability of the company’s existence being threatened. Variant 1 uses liquidity in a narrow sense and refers directly to net cash flow and liquidity ratios. Variant 2, on the other hand, uses liquidity in a broad sense, based on the probability of insolvency. Both concepts lead to similar results in the application example used here, with variant 1 focusing on liquidity management and variant 2 considering rating aspects.