Financial Distress Theory

Financial Distress Theory examines how a company struggles to meet its financial obligations, like paying debts or employees. When a business faces cash flow problems, it may resort to borrowing, cutting costs, or selling assets. This distress can lead to bankruptcy if not managed effectively. Key indicators include declining profits, rising debt, and increasing operational costs. Understanding this theory helps stakeholders—like investors and managers—recognize warning signs and make informed decisions to improve financial stability and avoid crises.