Ace the AFP Exam 2025 – Boost Your Financial Wizardry!

Financial distress signifies a situation in which a company faces challenges in fulfilling its financial obligations, such as repaying debt, meeting interest payments, or covering operational costs. This state often arises when a business experiences a significant decline in revenue, high operational costs, or unexpected liabilities that strain its cash flow.

When a company is in financial distress, it may struggle to generate enough income to maintain its operations effectively, potentially leading to further financial difficulties, such as bankruptcy or restructuring. Understanding this term is crucial for financial professionals, as identifying signs of distress can help them make informed decisions regarding risk management, financial strategies, and investment evaluations.

In contrast, the other options depict situations that are not associated with financial distress. For example, having substantial capital reserves suggests financial stability, while increases in profits and positive future cash flow indicate healthy financial performance, contrasting sharply with the concept of distress.