What signs tell you a company is heading for distress?

Group the signs into liquidity, leverage and market signals, and put cash and refinancing ahead of profit. Use numbers for leverage, coverage and covenants, check the maturity schedule, and name late signs like advisors, grace periods and forbearance.

Updated October 20, 2026

The numbers, step by step

$600 million of debt, $60 million of interest a year, EBITDA falling from $150 million to $90 million, and a 5.0 times maximum leverage covenant.

Leverage before$600 ÷ $150

4.0 times

Leverage after$600 ÷ $90

about 6.7 times

Interest coverage before$150 ÷ $60

2.5 times

Interest coverage after$90 ÷ $60

1.5 times

EBITDA at which the covenant breaks$600 ÷ 5.0

$120 million

What the interviewer listens for

• Do you organize the signs into liquidity, leverage and market signals?
• Do you put cash and refinancing ahead of earnings?
• Can you put numbers on leverage, coverage or a covenant?
• Do you mention maturities and the late signs?

Common mistakes

• Focusing on net income or one bad quarter.Liquidity and refinancing risk decide whether a company is in distress.
• Ignoring the debt maturity schedule, which is often the actual trigger.
• Treating a missed interest payment as an immediate default.Most bond indentures give a grace period, often 30 days, first.
• Listing signs with no thresholds, like leverage, coverage or covenant levels.

Likely follow-ups

• What's a forbearance agreement?Lenders agree not to act on a default for a set time, usually for fees and tighter terms, to give the company room to negotiate a fix.
• How do maintenance and incurrence covenants differ?Maintenance covenants are tested regularly, usually each quarter, and are typical of bank loans. Incurrence covenants are tested only when the company does something like borrow more, and are typical of high-yield bonds.

More finance technicals

• What's the difference between Chapter 11 and Chapter 7?
• What is a 363 sale?
• A company in Chapter 11 is worth $600 million. Claims are a $50 million DIP, $10 million of admin claims, $300 million of first lien, $200 million of second lien, $150 million of unsecured bonds and $50 million of trade claims. Who recovers what?
• What is DIP financing, and why would anyone lend to a bankrupt company?
• Why would a company try an out-of-court restructuring first?

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