Question

Using stock-based and flow-based approaches, define financial distress. ( please use your own words,don't just copy-paste from the source, explain it clearly with example)

Answer 1

Financial distress is a position when the company is not able to generate enough of the cash flows in order to meet with its debt obligation and the company will be forced to take corrective action.

Stock based approach to financial distress will be advocating that the value of the Assets of the company is lesser than the value of the Liability of the company and hence, the company is going through financial distress.

Flow-based financial distress will be advocating that when the cash flows of the companies are not able to meet with the current debt repayment obligation of the company and it is forcing the company into a financial distress position because the companies free cash flows is not able to meet the the Current repayment obligation of the debt capital.