What does it mean if a company is insolvent?

• A. It can pay all its debts
• B. It is maximizing its profits
• C. It is unable to pay debts owed
• D. It is ceasing operations permanently

Answer: (C)

When a company is described as insolvent, it indicates that it is unable to meet its financial obligations as they come due. This means that the debts the company owes exceed its available assets, or that it lacks sufficient cash flow to pay its current liabilities. Insolvency can lead to legal actions such as bankruptcy or reorganization, as creditors seek to recover what they are owed.

Insolvency is a critical financial condition that reflects a company’s current inability to manage its debts, and it often serves as a warning sign of more severe financial troubles. Understanding this definition is crucial, especially for stakeholders, as it affects decisions regarding investments, lending, and business operations.