A goal of financial managers is to avoid financial distress and ultimately bankruptcy.

What might they do to prevent such ?

For instance, are there any ratios that they could monitor that might help in avoiding financial distress?

Solutions

Expert Solution

One way in which financial distress can be prevented is by observing the level of debt that the company possesses. Debt incurs a fixed cost irrespective of the performance of the company. So when the company does not perform well, there is a chance of defaulting in its interest payments. To reduce this chance of bankruptcy, the level of debt can be optimized in the capital structure.

Solvency ratios can be used to determine the health of the company. Debt ratio and interest coverage ratio falls under solvency ratios that determine the solvency of a company.

jeff jeffy answered 1 year ago

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