Noncurrent Liabilities Definition

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What Are Noncurrent Liabilities?

Noncurrent liabilities, also called long-term liabilities or long-term debts, are long-term financial obligations listed on a company’s balance sheet. These liabilities have obligations that become due beyond twelve months in the future, as opposed to current liabilities which are short-term debts with maturity dates within the following twelve month period.

Key Takeaways

  • Noncurrent liabilities, also known as long-term liabilities, are obligations listed on the balance sheet not due for more than a year.
  • Various ratios using noncurrent liabilities are used to assess a company’s leverage, such as debt-to-assets and debt-to-capital.
  • Examples of noncurrent liabilities include long-term loans and lease obligations, bonds payable and deferred revenue.

Understanding Noncurrent Liabilities

Noncurrent liabilities are compared to cash flow, to see if a company will be able to meet its financial obligations in the long-term. While lenders are primarily concerned with short-term liquidity and the amount of current liabilities, long-term investors use noncurrent liabilities to gauge whether a company is using excessive leverage. The more stable a company’s cash flows, the more debt it can support without increasing its default risk.

Investors and creditors use numerous financial ratios to assess liquidity risk and leverage. The debt ratio compares a company’s total debt to total assets, to provide a general idea of how leveraged it is. The lower the percentage, the less leverage a company is using and the stronger its equity position. The higher the ratio, the more financial risk a company is taking on. Other variants are the long term debt to total assets ratio and the long-term debt to capitalization ratio, which divides noncurrent liabilities by the amount of capital available.

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

Examples of Noncurrent Liabilities

Noncurrent liabilities include debentures, long-term loans, bonds payable, deferred tax liabilities, long-term lease obligations, and pension benefit obligations. The portion of a bond liability that will not be paid within the upcoming year is classified as a noncurrent liability. Warranties covering more than a one-year period are also recorded as noncurrent liabilities. Other examples include deferred compensation, deferred revenue, and certain health care liabilities.

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Mortgages, car payments, or other loans for machinery, equipment, or land are all long-term debts, except for the payments to be made in the subsequent twelve months which are classified as the current portion of long-term debt. Debt that is due within twelve months may also be reported as a noncurrent liability if there is an intent to refinance this debt with a financial arrangement in the process to restructure the obligation to a noncurrent nature.

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View more information: https://www.investopedia.com/terms/n/noncurrent-liabilities.asp

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