What are non-current liabilities?
Non-current liabilities are an important metric to be considered when evaluating a company's financial health. This is because they can significantly affect a company's cash flow and its ability to repay its debts. Now, let us understand what non-current liabilities are.
Non-current liabilities are long-term financial obligations that are reported on a company's balance sheet. Any debts or financial commitments that are to be repaid after more than a year are classified as non-current liabilities. This differentiates non-current liabilities from current liabilities, which are short-term debts with maturity dates within the next year.
Why are non-current liabilities important?
Non-current liabilities and cash flow are compared to determine whether a company can satisfy its financial obligations in the long run. While lenders typically focus more on short-term liquidity and the size of current obligations of a company, long-term investors assess non-current liabilities to determine if it is over-leveraged or has more debt than it can repay.
There are several types of non-current liabilities, such as bank loans, bonds, leases, and deferred tax liabilities.
Types of Non-current Liabilities
Following are some typical examples of non-current liabilities that you can find on a company’s balance sheet:
A debenture is a type of long-term debt instrument. It is issued by a business without any asset backing. The organisation's reputation and creditworthiness support it. Credit rating agencies determine the creditworthiness of businesses looking to raise debt through this route. Larger firms typically issue debentures.
2. Bonds Payable
Debentures and bonds are similar. The only distinction is that bonds are backed by some form of collateral, like irrevocable letters of credit or fixed assets. These are typically issued to raise capital to finance new projects. Bonds are issued through an investment bank. The borrower is required to pay interest at set rates for a predetermined period of time. Bonds payable are considered as non-current liabilities since they tend to have a repayment period of more than a year.
3. Long-Term Loans
Long-term loans are the most typical type of non-current liabilities. A business is required to repay these over several years. These loans are made by traditional banking or financial institutions and are secured by collateral.
Businesses with a higher credit rating can get these loans at a cheaper interest rate. Companies may have a fixed line of credit with their lenders, which they use when required. For instance, a company may draw upon its predetermined line of credit to buy new machinery.
Current and non-current liabilities are helpful indicators of a company's financial health. Long-term liabilities, for instance, are used to assess the feasibility of a new business endeavour. Taking on more debt is not good if your cash flow is insufficient to pay off future obligations.
When analysing financial ratios, non-current liabilities are used by investors, creditors, and business owners equally. These provide a brief picture of liquidity by comparing obligations to assets or equity.
Investors are cautious if a company uses most of its principal resources solely to satisfy its financial obligations. This is because it suggests that no money may be left for expansion. To keep financial commitments in check, a company must ensure to keep track of all forms of liabilities.
Q. Which financial ratios are used to evaluate non-current liabilities and assess a company's leverage?
Creditors, investors, and financial analysts use the debt-equity and interest coverage ratios to evaluate and assess a company’s financial leverage. The debt-to-equity ratio calculates a company's level of leverage by comparing its total debt to its total assets. The interest coverage ratio determines whether a business makes enough money to satisfy its interest obligations.
Q. What are a few examples of non-current liabilities?
Debentures, long-term loans, bonds payable, deferred tax liabilities, long-term leasing commitments, and pension benefit payments are examples of non-current liabilities. Additionally, longer-term warranties are also an example of non-current liabilities. Deferred pay, deferred revenue, and some liabilities related to healthcare are also good examples of non-current liabilities.
Working capital is an important metric for gauging a company's ability to take care of its day-to-day operations. Let's dive deeper to understand its role in the financial analysis of a company.