Difficulty There is a declining trend in operating results, with growing net losses leading to operating losses. Asset turnovers decrease and cash flow from operations also falls. Financial leverage increases, mainly from reductions in net worth. Distress Increasing operating losses and slowing asset turnovers lead to negative cash flow from operations. Borrowing increases as a result.
Leverage rises sharply on the combination of more debt and less net worth.
The company breaches financial covenants in its loan agreements. For a company with a stable or improving outlook Discretionary Cash Flow is the relevant measure. But it excludes sources and uses of funds not directly connected to the company's continuing sources and uses of cash, its operations and strategies. If you are considering the possibility of the company's entering into difficulty, the relevant measure eliminates outflows for dividends and share repurchases. This adds dividends and share repurchases back into the cash flow available for debt repayment.