What characterizes financial distress in a corporate context?

Financial distress in a corporate context primarily refers to a situation where a company is struggling to meet its financial obligations, particularly its debt obligations. This situation often arises when a firm's cash flows are insufficient to cover its scheduled payments, leading to challenges such as late payments or defaults on loans.

When a company faces financial distress, its ability to satisfy debt obligations becomes a critical concern. This often manifests in difficulty making interest payments or repaying principal amounts on borrowed funds. Such distress may result from a variety of factors, including poor sales, high levels of debt, operational inefficiencies, or adverse market conditions. Therefore, the correct characterization of financial distress is indeed the difficulty in satisfying these debt obligations.

In contrast, being able to expand operations and pay dividends indicates a healthy financial status, as does ease of meeting debt obligations. Guaranteed profit from investments, while an ideal scenario, does not accurately describe financial distress since it implies stability and profitability, opposing the very essence of financial turmoil.