Corporate Finance & Accounting

Non-current liabilities

What are non-current liabilities?

Non-current liabilities, also known as long-term liabilities or long-term debt, are long-term financial obligations listed on a company’s balance sheet. Obligations for these liabilities are due after the next twelve months, while current liabilities are short-term debt due within the next twelve months.

key takeaways

  • Non-current liabilities, also known as long-term liabilities, are obligations listed on the balance sheet that are due in less than one year.
  • Various ratios using non-current liabilities are used to assess a company’s leverage, such as debt-to-assets and debt-to-capital.
  • Examples of non-current liabilities include long-term loan and lease obligations, bonds payable, and deferred revenue.

Understanding Non-Current Liabilities

Compare non-current liabilities with cash flow to see whether a company can meet its financial obligations over the long term. While lenders focus primarily on short-term liquidity and the amount of current liabilities, long-term investors use illiquid liabilities to gauge whether a company is using excessive leverage. The more stable a company’s cash flow is, the more debt it can support without increasing the risk of default.

important

Current liabilities assess liquidity and non-current liabilities help assess solvency.

Investors and creditors use a variety of financial ratios to assess liquidity risk and leverage. The debt ratio compares a company’s total debt to its total assets to give a rough idea of ​​a company’s leverage. The lower the percentage, the less leverage the company uses and the stronger its equity position. The higher the ratio, the more financial risk the company takes. Other variants are the ratio of long-term debt to total assets and the ratio of long-term debt to capitalization, which divide non-current liabilities by the amount of available capital.

Analysts also use coverage ratios to assess a company’s financial health, including cash flow to debt and interest coverage. The cash flow-to-debt ratio determines how long a company will take to service its debt if it uses all of its cash flow to pay down its debt. The interest coverage ratio is calculated by dividing a company’s earnings before interest and taxes (EBIT) by the debt interest payments for the same period and measures whether enough income is generated to cover interest. To assess short-term liquidity risk, analysts look at liquidity ratios such as current ratio, quick ratio and acid test ratio.

Example of non-current liabilities

Non-current liabilities include bonds, long-term loans, bonds payable, deferred tax liabilities, long-term lease obligations and pension benefit obligations. The portion of the bond liability that will not be paid within the next year is classified as a non-current liability. Guarantees longer than one year are also recorded as non-current liabilities. Other examples include deferred compensation, deferred revenue, and certain healthcare liabilities.

Mortgage loans, car payments, or other loans for machinery, equipment, or land are long-term debt, but payments made within the subsequent twelve months are classified as the current portion of the long-term debt. Debt maturing within twelve months may also be reported as a non-current liability if, in the process of restructuring the debt to a non-current nature, there is an intention to refinance that debt through a financial arrangement.

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