Comment on the following: Failure of a firm is technical if it is unable to meet its current obligations.

Failure of a firm is technical if it is unable to meet its current obligations. The failure could be temporary and might be remediable. When liabilities exceed assets, i.e., the net worth becomes negative, resulting in bankruptcy. Technical bankruptcy can be ascertained by comparing current assets and current liabilities, i.e., current ratio or quick ratio. A negative working capital indicates that short-term borrowings are used for financing long-term assets, which may lead to insolvency in the future. For example, a high level of interest payment due to a high proportion of debt in the capital structure may result in inadequate cash flows. If the situation persists for a long time, it may result in financial crises due to pressure from creditors, and creditors would take their loan back from the company. It will impact the share price of the company also as investors will withdraw their funds. In short, a company may find itself in a situation of financial distress.