financial distress

(noun)

a term used to indicate a condition when promises to creditors are broken or honored with difficulty.

Related Terms

Examples of financial distress in the following topics:

  • Financial Management Before and During Bankruptcy

    • To avoid the negative impacts of bankruptcy, individuals and companies in financial distress can implement certain financial management techniques.
    • Financial Management before and during Bankruptcy is an effective method for companies and individuals to remedy financial distress and insolvency.
    • To avoid the negative impacts of bankruptcy, individuals and companies in financial distress have a number of bankruptcy alternatives.
    • For a company, there are many options of avoiding financial distress, including:
    • Devise a management plan when a company is in financial distress

  • Striking Agreements to Avoid Bankruptcy

    • Debt restructuring is a process that allows a company or individual in financial distress to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and continue its operations.
    • These deals typically occur with large companies in financial distress, and often result in these companies being taken over by their principal creditors.

  • Trade-Off Consideration

    • It states that there is an advantage to financing with debt—the tax benefits of debt, and there is a cost of financing with debt—the cost of financial distress including bankruptcy.
    • Of course, using equity is initially more expensive than debt because it is ineligible for the same tax savings, but becomes more favorable in comparison to higher levels of debt because it does not carry the same financial risk.

  • What Happens in Bankruptcy

    • Individuals or entities undergoing financial distress may be forced to consider bankruptcy.
    • The principal focus of insolvency legislation and business debt restructuring practices is not on the elimination of insolvent entities but on remodeling the financial and organizational structure of debtors experiencing financial distress, so as to permit the rehabilitation and continuation of their business.

  • Capital Structure Overview and Theory

    • The cost of equity for a leveraged firm is equal to the cost of equity for an unleveraged firm, plus an added premium for financial risk
    • It states that there is an advantage to financing with debt (the tax benefits of debt) and that there is a cost of financing with debt (the bankruptcy costs and the financial distress costs of debt).

  • Market/Book Ratio

    • The price-to-book ratio is a financial ratio used to compare a company's current market price to its book value.
    • The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market price to its book value.
    • For companies in distress, the book value is usually calculated without the intangible assets that would have no resale value.

  • Uses of the Financial Statement

    • For large corporations, these statements are often complex and may include an extensive set of notes to the financial statements and explanation of financial policies andmanagement discussion and analysis.
    • Notes to financial statements are considered an integral part of the financial statements.
    • Prospective investors use financial statements to perform financial analysis, which is a key component in making investment decisions.
    • A lending institution will examine the financial health of a person or organization and use the financial statement to decide whether or not to lend funds.
    • One of the uses of financial statements is as a budgeting tool, as in this example.

  • Evaluating Financial Statements

    • With a few exceptions, the majority of the data used in ratio analysis comes from evaluation of the financial statements.
    • Ratio analysis is a tool for evaluating financial statements but also relies on the numbers in the reported financial statements being put into order to be used as ratios for comparison over time or across companies.
    • Financial statements are used as a way to discover the financial position and financial results of a business.
    • Ratios put this financial statement information in context.
    • Prior to the calculation of financial ratios, reported financial statements are often reformulated and adjusted by analysts to make the financial ratios more meaningful as comparisons across time or across companies.

  • Strategic Planning

    • A financial forecast is an estimate of future financial outcomes for a company.
    • Unlike a financial plan or a budget, a financial forecast doesn't have to be used as a planning document.
    • Financial forecasting is often helped by processes of financial modeling.
    • Financial modeling is the task of building an abstract representation (a model) of a financial decision making situation.
    • Once the financial statements are forecast, one can attach a value to the firm, and see what changes need to be made to put the company in a better financial position.

  • Defining the Financial Statement

    • Financial statements report on a company's income, cash flow and equity.
    • A financial statement is a formal report of the financial activities of a business, person, or other entity.
    • Financial statements are a key component of accounting; the process of communicating information about a financial entity .
    • A balance sheet is often described as a "snapshot of a company's financial condition" at a single point in time.
    • For complex entities, financial statements often include an extensive set of notes as an explanation of financial policies.