"Risk comes from not knowing what you're doing." –Warren Buffett
Value investors understand that risk is one of the three main inputs to an intrinsic valuation, the others being profitability and capital management.
It’s easy to forget or misunderstand risk. Growth in the form of higher sales, earnings, dividends and share prices is tangible and visible but risk is intangible, not directly visible and harder to understand and measure. Despite this the most successful value investors have a keen understanding of risk in a company and make the right calls on risk before the rest of the market does. When screening for your universe of investible stocks valuations must not only reflect where risk is now but where it is heading. This knowledge is valuable because the market can very quickly price in shifts in risk and catch out the uninformed investor. It’s important to act in advance.
Risk in a business relates to the volatility and predictability of earnings (earnings risk) and the security of shareholders’ funds, especially from lenders (financial risk). The two concepts are related and sensitive to the level and variability of return on equity, how wisely boards and management reinvest earnings for growth, indebtedness, whether a business uses acquisitions to strengthen competitive advantage or build a larger but less profitable empire, and how easy or hard it is for management to predict the future and provide accordingly.
source article: Clime Group-Risky Business