Analyzing a company's financial statements to identify potential financial distress involves a multi-faceted approach that encompasses examining key ratios, identifying trends, and assessing qualitative factors.
Key Ratios:
Liquidity Ratios: These ratios measure a company's ability to meet its short-term obligations. A declining current ratio (current assets / current liabilities), quick ratio (liquid assets / current liabilities), or cash ratio (cash and cash equivalents / current liabilities) can signal liquidity problems.
Solvency Ratios: These ratios assess a company's ability to meet its long-term debt obligations. A deteriorating debt-to-equity ratio (total debt / total equity), times interest earned ratio (earnings before interest and taxes / interest expense), or debt-to-asset ratio (total debt / total assets) can indicate solvency concerns.
Profitability Ratios: While not directly related to financial distress, declining profitability ratios like gross profit margin (gross profit / reve....
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