ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction
Which of the following is the most direct financial indicator that a company may be heading for financial distress and may need reconstruction?
Interest cover below 1, negative operating cash flow and covenant breaches together show the company cannot service its debt from its operations and lenders may demand repayment. The other options describe improving or stable financial positions, so they do not indicate a need for reconstruction.
- AA rising share price accompanied by growing dividend cover
- BInterest cover falling below 1 together with negative operating cash flow and breaches of loan covenantsCorrect
- CA rise in the proportion of non-current assets financed by equity
- DAn increase in the current ratio from 1.5 to 2.0 because of higher cash balances
Explanation
Distress is signalled by inability to service debt from operating earnings and cash, and by covenant breaches that may trigger repayment demands. The other options describe strengthening or neutral positions: rising share price and dividend cover, more equity funding, and better liquidity.
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