Which of the following is a common credit risk?

• A. Deteriorating revenue base.
• B. Increase current liabilities.
• C. Increase in net worth.
• D. Insufficient cash flow.

Answer: (D)

The main idea here is the borrower’s ability to service debt from its cash inflows. Credit risk surfaces when there isn’t enough cash coming in to meet debt payments, interest, and other obligations. That’s why insufficient cash flow is the clearest and most direct indicator of credit risk: it directly measures whether the company can cover its debt service with its actual cash, which is what lenders rely on when assessing repayment reliability.

Deteriorating revenue base can threaten future cash generation, but on its own it doesn’t prove current incapacity to meet obligations; margins or cost controls could offset revenue declines. An increase in current liabilities shows more short-term obligations but doesn’t reveal whether cash on hand will cover them. An increase in net worth signals stronger equity and generally lowers risk, not increases it. In practice, lenders look at cash flow to compute debt service coverage; when cash flow is insufficient, the risk of default becomes evident.