Non Current Liabilities, sometimes referred to as Long Term Liabilities or Long Term Debts, are long-term debts or financial obligations that are reported on a company's balance sheet. Unlike current liabilities, which are short-term debts with maturity dates within the next year, these liabilities include obligations that become due at a time that is more than a year from now.
Understanding Non-Current Liabilities
To determine whether a company will be able to satisfy its financial obligations in the long run, noncurrent liabilities and cash flow are compared. While long-term investors assess noncurrent liabilities to determine if a company is utilizing excessive leverage, lenders are more focused on short-term liquidity and the size of current obligations. A corporation can support a greater amount of debt without raising its default risk the more stable its cash flows are.
Many financial ratios are used by creditors and investors to evaluate leverage and liquidity risk. To give a basic notion of how leveraged a company is, the debt ratio compares total debt to total assets. The stronger a company's equity position and the lower the proportion, the less leverage it is utilizing. The greater the percentage, the greater the financial risk being assumed by the organization. The long-term debt to total assets and long-term debt to capitalization ratios, which divide noncurrent liabilities by the amount of capital available, are additional variations.
Examples of Non Current Liabilities
Non Current Liabilities include obligations to pay pension benefits, long-term loans, bonds payable, deferred tax liabilities, and long-term leasing commitments. A bond liability's component that won't be paid off in the coming year is referred to as a noncurrent liability. Moreover, longer-term warranties are classified as noncurrent liabilities. Deferred pay, deferred revenue, and some liabilities related to health care are additional examples.
Long-term debts include anything from mortgages and auto payments to loans for land, machinery, and equipment, with the exception of the payments that must be made in the coming year, which are categorized as the present share of long-term debt. If there is a plan to refinance the debt with a financial arrangement in the works to restructure the obligation to a noncurrent nature, the debt that is due within a year may also be recorded as a noncurrent liability.
Key Financial Ratios that Use Non-Current Liabilities
Several financial ratios are used by creditors, investors, and financial analysts to evaluate non-current liabilities and assess a company's leverage and liquidity risk. A few of the ratios are:
- Debt Ratio: The debt ratio calculates a company's level of leverage by comparing its total debt to its total assets. It displays the percentage of the business's capital that is financed by borrowing money. A corporation has less leverage and a better equity position the lower the percentage. A large proportion indicates substantial leverage for the business, which raises its default risk. A debt to total asset ratio of one indicates a company's negative net worth and increased default risk.
- Interest Coverage Ratio: The interest coverage ratio is used to determine whether a business is making enough money to satisfy its interest obligations. The ratio is calculated by dividing earnings before interest and taxes (EBIT) by the amount of interest paid for a specific time period. Higher coverage ratios indicate that the company can comfortably pay interest and take on more debt.
Types of Non-Current Liabilities
The primary categories of non-current liabilities that are shown on the balance sheet are as follows:
- Credit lines: A credit line is a contract between a borrower and a lender whereby the lender agrees to make a certain amount of money accessible to the borrower's business as needed. The business draws a particular amount of credit as needed up to the credit limit permitted by the lender rather than receiving a single quantity of credit. A credit line typically has a time limit during which the business can draw money.
- Long-term lease: Companies frequently have to pay lease payments in order to satisfy their agreements to make purchases. Capital leasing is a method that businesses employ to finance the acquisition of fixed assets like automobiles and industrial machinery. If the lease term exceeds one year, the lease payments made towards the capital lease are treated as non-current liabilities since they reduce the long-term obligations of the lease. The property purchased using the capital lease is recorded as an asset on the balance sheet.
- Bonds payable: An agreement for a long-term loan between a lender and a borrower known as a bond is used to finance capital projects. Bonds are issued through an investment bank, and if the repayment period is more than a year, they are categorized as long-term obligations. The borrower is required to pay interest at set rates for a predetermined amount of time, typically longer than a year.
- Deferred tax liabilities: The amount of taxes owed by a business that are due to be paid in the future but have not yet been paid during the current period are referred to as deferred tax obligations. By calculating the difference between the accrued tax and the taxes payable, the liability is determined. As a result of a transaction that took place during the present period for which tax hasn't been paid, the corporation will have to pay extra tax in the future.