How can a profitable company go bankrupt due to high interest expense?

How to answer

A company can be profitable on a GAAP Net Income basis and still go bankrupt if its interest expense is high enough to consume its operating cash flow. Bankruptcy is a cash issue, not an accounting issue: if the company can't service its debt (i.e., make interest payments and principal repayments), creditors can force it into bankruptcy regardless of reported earnings. This often happens to highly levered companies in cyclical industries — when EBITDA dips, interest coverage falls below 1x, and the company runs out of cash even though it shows positive accounting profit in some quarters. EBITDA can mask this risk because it excludes interest entirely.