Financial Distress

AAA

DEFINITION of 'Financial Distress'

A condition where a company cannot meet or has difficulty paying off its financial obligations to its creditors. The chance of financial distress increases when a firm has high fixed costs, illiquid assets, or revenues that are sensitive to economic downturns.

INVESTOPEDIA EXPLAINS 'Financial Distress'

A company under financial distress can incur costs related to the situation, such as more expensive financing, opportunity costs of projects and less productive employees. The firm's cost of borrowing additional capital will usually increase, making it more difficult and expensive to raise the much needed funds. In an effort to satisfy short-term obligations, management might pass on profitable longer-term projects. Employees of a distressed firm usually have lower morale and higher stress caused by the increased chance of bankruptcy, which would force them out of their jobs. Such workers can be less productive when under such a burden.

RELATED TERMS
  1. Cost Of Capital

    The required return necessary to make a capital budgeting project, ...
  2. Distress Price

    When a firm chooses to mark down the price of an item or service ...
  3. Supervisory Capital Assessment ...

    A financial stress test conducted by the Federal Reserve System ...
  4. Distressed Securities

    A financial instrument in a company that is near or is currently ...
  5. Stress Testing

    A simulation technique used on asset and liability portfolios ...
  6. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
Related Articles
  1. Breaking Down The Balance Sheet
    Personal Finance

    Breaking Down The Balance Sheet

  2. The Working Capital Position
    Investing Basics

    The Working Capital Position

  3. Are You Living Too Close To The Edge?
    Budgeting

    Are You Living Too Close To The Edge?

  4. Why Hedge Funds Love Distressed Debt
    Mutual Funds & ETFs

    Why Hedge Funds Love Distressed Debt

comments powered by Disqus
Hot Definitions
  1. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  2. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  3. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  4. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  5. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  6. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
Trading Center