possibility that a company will be unable to meet its debt obligations.
Bankruptcy risk describes the likelihood that a firm will become insolvent
because of its inability to service its debt. A firm can fail financially
because of cash flow problems resulting from inadequate sales and high
operating expenses. To address the cash flow problems, the firm might increase
its short-term borrowings. If the situation does not improve, the firm is at
risk of insolvency or bankruptcy. Many investors consider a firm's bankruptcy
risk prior to making equity or bond investment decisions. Agencies such as
Moody's and Standard & Poor's attempt to assess risk by giving bond
ratings. Also called "insolvency risk."