What are Non-Current Liabilities

Key Takeaways

• Long-term obligations that are due within one year are classified as non-current liabilities.
• Non-current liabilities are included on a company's balance sheet as part of its financial capital structure.
• These liabilities may demonstrate both growth potential and risk.
• Investors may use these liabilities to evaluate near-term cash flows, stability, and financial health.

Introduction

When you begin to learn about company finance or start analysing stock, you will notice that the term ‘non-current liabilities’ is used quite frequently. While it seems quite technical at first, once you understand what it means, you can use it as an important tool in analysing the financial health of a company over time.

Let’s learn about ‘non-current liabilities’ in simple terms, so we can apply what we learn practically.

Understanding Non-Current Liabilities

Non-current liabilities, also called long-term liabilities, are financial obligations of a company that don’t have to be paid off within the next financial year. They are dues that need to be cleared over time, after one year from the date shown on the balance sheet.

For example, let’s assume a company takes a loan that has to be paid off over time, say after 5 or 10 years. This loan is a non-current liability because it does not have to be paid off right away. It is included in the long-term financial obligations of the company.

Non-current liabilities are listed on the right-hand side of the balance sheet, just below the ‘current liabilities.’

Why Do Non-Current Liabilities Matter?

While liabilities seem like something negative at first, because they represent money owed by the company, we need to think about what they really mean.

Non-current liabilities can sometimes mean that the company is growing.

Companies take long-term loans to:

• Expand their operations
• Invest in new projects
• Buy assets like machinery or property

This means that while liabilities are always present in any company, what is important is the way the company uses these liabilities.

Non-current liabilities are important for investors because they want to know the answer to important questions:

1. Will the company be able to survive in the long run?
2. Is the company taking too much debt?
3. Will the company be able to pay off its debt easily?

These are the key points that need to be considered in order to evaluate the financial condition of the company.

Current Liabilities vs Non-Current Liabilities

Common Types of Non-Current Liabilities

Now, to understand this concept more clearly, let's discuss the following:

Long-Term Loans and Bonds

Long-term loans and bonds refer to the loans taken by the company for the purpose of expansion. These loans are usually paid off over a long period of time.

Deferred Tax Liabilities

Sometimes the company pays less tax in the present and more tax in the future. This tax liability is known as deferred tax liability.

Pension Liabilities

If the company offers pensions to its employees, then it has to pay them after retirement. The liability that the company has to pay in the long run is known as non-current liability.

Lease Liabilities

If the company leases a property for a long period of time, then the liability that the company has to pay in the long run is known as non-current liability.

Contingent Liabilities

Contingent liabilities refer to the potential liability that may arise in the future. If the contingent liability arises after one year, then it is considered to be a non-current liability.

How Investors Use Non-Current Liabilities

Smart investors do not just consider the profits earned by the company; they also consider the company's liabilities. Now, let's discuss the following:

Assessing the Company's Financial Health

If the company has low non-current liabilities, then the company is considered to be in good financial health.

Evaluating the Company's Risk

If the company has high long-term debt, and doesn’t have a concrete plan or lacks financial capacity to repay it then it may face financial difficulties in the future.

Understanding the Company's Cash Flow

Non-current liabilities show the future payments. Investors will check if the company will generate enough cash to pay the debts.