Page 307 - AFM Integrated Workbook STUDENT S18-J19

Corporate failure and reconstruction

1.4 Practical indicators of financial distress

Ratio analysis and free cash flow analysis are not the only ways of identifying that a
company is in financial distress.

Other possible indicators are:

 Information in the published accounts, for example:

– a worsening cash and cash equivalents position shown by
the cash flow statement

– very large contingent liabilities

– important post-balance sheet events.

 Information in the chairman’s report and the directors’ report
(including warnings, evasions, changes in the composition of
the board since last year).

 Information in the press (about the industry and the company or
its competitors).

 Information about environmental or external matters.

Look out for this sort of information in an exam question.

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