Fundamentals of Financial Management, Third Edition

SUMMARY

Failure does not necessarily mean a firm’s dissolution or collapse. Economic failure occurs when a firm does not operate profitably. Financial failure occurs either when a firm is not able to meet its contractual obligations either on account of illiquidity or when its liabilities exceed the value of its assets.

Corporate failure can be predicted to a large extent with the help of financial ratios. These ratios normally relate to the earning power, debt burden, net working capital, etc., of the firm.

There are a number of measures to handle failure. Their application depends on the nature of failure, gravity of failure, and the choice of the creditors and shareholders. Contingency planning is adopted when distress is in its early phases. ...