A company can continue its operation when it has adequate amount of funds and such funds are utilizes in an efficient way. The funds are use to meet the short term as well as long term obligations. Short term obligation includes- payment to creditors, salary, wages, dividend etc. and long term obligation includes- acquisition of fixed assets, investments, businesses etc. Investors provide funds to a company in the way of investment to get some positive return in future. But if they donât get expected return then it will be difficult for the company to arrange funds in future. So it is the duty of the management to ensure the effective utilization of fund. Different stakeholders (such as- shareholders, creditors, banks, employees, management etc.) analyses the financial information for making various decisions. The result of the analysis shows the present performance and future prospect of the company. Distress analysis is a part of financial analysis, which shows whether there is any possibility of bankruptcy of a company in near future or not. Actually bankruptcy refers to the situation when a company unable to pay its debts. When a company faces financial distress for long period then companyâs liquidity position, solvency position become very poor. Besides this situation decline revenue collection due to reduction of sales, as a result company cannot pay its due and cannot earn profit. So it gradually reduces the amount of net worth, and adversely affects on companyâs share price and reputation. There are different reasons for the distress of a business entity, such are- lack of finance, lack of demand of the product in the market, conflict between management and employees, lack of managerial efficiencies and some other internal and external problems. If these problems continues for a long period of time then a business entity suffer huge problems and can be declared it as bankrupt and goes into liquidation. As a result, it reduces employment opportunity, Government earnings, industrial growth etc. and also deeply effects on the area where the entity belonged. So it is very clear that prediction of bankruptcy of business firmsâ has a great value to the stakeholders. Because if the result shows that a firm has the chances of bankruptcy in future then investors can be concerned about their investment as well as management can take remedial actions to make the firm in good position.
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