What is a common sign of financial distress in a company?

A common sign of financial distress in a company is declining cash flow and increasing leverage. Financial distress often manifests when a company struggles to generate sufficient cash flow to meet its ongoing obligations, leading to an overreliance on debt financing. As cash flow declines, the company may feel pressured to take on more debt, which increases leverage. This situation can create a cycle where the company becomes increasingly reliant on borrowed funds to operate, ultimately resulting in difficulty repaying those debts.

In contrast, increasing profitability and cash reserves suggest a healthy financial position, which is not indicative of distress. Rising stock prices and shareholder confidence also reflect positive market sentiment and stability, while stable revenue streams and market expansion demonstrate robust operational performance. These factors highlight the challenges a distressed entity faces, specifically how cash flow management and leverage are critical in assessing a company's financial health.