24.2 SYMPTOMS OF FINANCIAL DISTRESS

Although financial distress cannot be predicted with certainty, yet there are certain indicators on the basis of which a finance manager can predict it. These indicators are nothing but financial ratios. Beaver (1986) finds in his study of 79 large firms some specific ratios that indicate the possibility of financial distress. They are as follows:

 

Illiquidity is technical insolvency that emerges on account of a shortage of cash. On the other hand, insolvency is bankruptcy insolvency where a firm’s total liabilities exceed fair market value of its assets.

  1. Cash flow/Total debt
  2. EBIT/Total assets
  3. Cash flow/Total assets
  4. Net income/Total assets
  5. Sales/ Total assets
  6. Total debt/Total assets

It is suggested that ...

Get Fundamentals of Financial Management, Third Edition now with the O’Reilly learning platform.

O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.

Start your free trial