
Financial obligations that are not expected to be settled within one year
A non-current liability refers to the financial obligations in a company’s balance sheet that are not expected to be paid within one year. Non-current liabilities are due in the long term, compared to short-term liabilities, which are due within one year.
Analysts use various financial ratios to evaluate non-current liabilities to determine a company’s leverage, debt-to-capital ratio, debt-to-asset ratio, etc. Examples of long-term liabilities include long-term lease obligations, long-term loans, deferred tax liabilities, and bonds payable.
Non-current liabilities are one of the items in the balance sheet that financial analysts and creditors use to determine the stability of the company’s cash flows and the level of leverage. For example, non-current liabilities are compared to the company’s cash flows to determine if the business has sufficient financial resources to meet arising financial obligations in the organization.
If the company enjoys stable cash flows, it means that the business can support a higher debt load without increasing its risk of default. However, if its non-current liabilities are inadequate, then investors will be hesitant to invest in the company, and creditors will shy away from doing business with it.
Investors, creditors, and financial analysts use various financial ratios to assess the non-current liabilities to determine the leverage and liquidity risk of a company. Some of the ratios include:
The debt ratio compares a company’s total debt to total assets to determine the level of leverage of a company. It shows the portion of the company’s capital that is financed using borrowed funds. The lower the percentage, the less leverage a company has, and the stronger its equity position.
A high percentage shows that the company has high leverage, which increases its default risk. A debt to total asset ratio of 1.0 means the company has a negative net worth and is at a higher risk of default.
The interest coverage ratio is used to assess whether a company is generating sufficient income to cover interest payments. The ratio is obtained by taking the earnings before interest and taxes (EBIT) and dividing it by the interest expense incurred in a given period. A higher coverage ratio means that the business can comfortably handle its interest payments and take on additional debt.
The following are the main types of non-current liabilities that are included in the balance sheet:
A credit line is an arrangement between a lender and a borrower, where the lender makes a specific amount of funds available for the business when needed. Instead of getting lump-sum credit, the business draws a specific amount of credit when needed up to the credit limit allowed by the lender.
A credit line is usually valid for a specified period of time when the business can draw the funds. If a business draws funds to purchase industrial equipment, the credit will be classified as a non-current liability.
Lease payments are common expenditures that companies are required to meet to fulfill their purchase commitments. Companies use capital leases to finance the purchase of fixed assets, such as industrial equipment and motor vehicles.
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.
A bond is a long-term lending arrangement between a lender and a borrower, and it is used as a means of financing capital projects. Bonds are issued through an investment bank, and they are classified as long-term liabilities if the payment period exceeds one year. The borrower must make interest payments at fixed amounts over an agreed period of time, usually more than one year.
A note, also called a promissory note, is a special type of loan arrangement where a borrower makes an unconditional promise to pay back the principal plus interest to the lender. The promissory note is used to finance the purchase of assets such as machinery and buildings. If the maturity period of the note exceeds one year, it is considered a non-current asset.
Deferred tax liabilities refer to the amount of taxes that a company has not paid in the current period, and that are required to be paid in the future. The liability is calculated by finding the difference between the accrued tax and the taxes payable. Therefore, the company will be required to pay more tax in the future due to a transaction that occurred in the current period for which tax has not been remitted.
Thank you for reading CFI’s guide to Non-Current Liability. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:
CFI is a global provider of financial modeling courses and of the FMVA Certification. CFI’s mission is to help all professionals improve their technical skills. If you are a student or looking for a career change, the CFI website has many free resources to help you jumpstart your Career in Finance. If you are seeking to improve your technical skills, check out some of our most popular courses. Below are some additional resources for you to further explore:
CFI is a global provider of financial modeling courses and of the FMVA Certification. CFI’s mission is to help all professionals improve their technical skills. If you are a student or looking for a career change, the CFI website has many free resources to help you jumpstart your Career in Finance. If you are seeking to improve your technical skills, check out some of our most popular courses. Below are some additional resources for you to further explore:
Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy.
A well rounded financial analyst possesses all of the above skills!
CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation. CFI is on a mission to enable anyone to be a great financial analyst and have a great career path. In order to help you advance your career, CFI has compiled many resources to assist you along the path.
In order to become a great financial analyst, here are some more questions and answers for you to discover:
Access and download collection of free Templates to help power your productivity and performance.
Already have an account? Log in
Take your learning and productivity to the next level with our Premium Templates.
Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI's full course catalog and accredited Certification Programs.
Already have a Self-Study or Full-Immersion membership? Log in
Gain unlimited access to more than 250 productivity Templates, CFI's full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more.
Already have a Full-Immersion membership? Log in