Non-current liabilities

Right from its name we can predict that it is those obligations that are not settled in the current accounting period. They are known as long-term liabilities as they are not settled within the 12 month period or in the stipulated accounting period.

Dive in to read, how non-current liabilities have its effect over the entity’s financial health and ratios associated with it. The current liabilities were as with the liquidity ratios like the quick and the current ratio which said how far the entity is able to meet its short term obligation. If the ratio is low, then the firm was not able to liquidate its assets to meet its liabilities. The non-current liabilities are associated with the long term obligations of the entity. So it’s associated with the Solvency ratios such as debt to equity ratio, debt ratio.

Non-Current Liabilities = Long Term borrowings +  Long term leases + Provisions +Deferred Tax Liabilities + Debentures + Bonds + Other long-term liabilities.

Reliance Industries Ltd. FY 2018-19

Long term loans:

It is the amount taken as a loan by the company. This amount is used for the expansion, development and for the growth of the organization. If the repayment of the borrowed money takes more than a year, then they are categorized under non-current liability. This includes debentures, bonds, public deposits and loans and advances from financial institutions and banks. The borrowing has increased from Rs.81,596 Cr to Rs1,18,098 Cr.

Long term Lease:

If the organization is facing any deficit in commercial or rental property then usually the organization leases the asset for more than 1year. The leased assets are used for production activities or for the day to day activities of the entity. Sometimes at the end of the lease period the ownership of the asset fully come to hand which is known as capital lease.

Deferred tax liabilities:

The tax recognized in the current year but due next year is termed as deferred tax. The tax payable is owed to the tax authorities. This happens when there occurs a difference between Accounting statement and tax statement. This difference occurs when profit accounted in accounting statement is more than tax statement due to the different methods of depreciation used and different method of recognizing expense and revenue. The due amount of tax has increased from Rs.27,926 Cr. to Rs.47,317 Cr.

Long term provisions:

These are the amount which is estimated approximately by comparing the expenses of the previous year. The provision allocated for the liability which will arise after a year is known as long-term liabilities. They are the provisions made for the liabilities which arise after the date of balance sheet or an operating Cycle. The provisions which exist more than 12months. Examples:  Provisions kept aside for pension benefit, warranty, guarantee and for the benefit of the employees.

In the above given comparative balance sheet, the overall non-current liabilities has increased by Rs.56171Cr. Mainly in borrowing and deferred tax. So we come to know that entity has borrowed funds to expand.

Non-current liabilities and financial health

Before investing in a company, a long term investor always checks out for non-current liabilities too! As non-current liabilities are always used for the growth and expansion of the business like for the entity’s investment and its requirement for the function of the business. So non-current liabilities are always observed for how far the company has leveraged that mean how far the company has used its borrowed capital to finance the assets of the company. So, if the company has a good cash flow, then the company is doing well in the long term. It is said that these companies will be able to handle the long term debt. But one cannot just decide by comparing by seeing these numbers. We have to company with the ratios.

Debt to equity ratio:

Debt-Equity ratio = Total Liabilities / Total Shareholders’ Equity

By dividing the total liabilities by total shareholders equity one can decide if the market shares would go down or up. This ratio tells us how the debts are leveraged for the company. If the end ratio is higher then the liabilities are higher than the equity. That would mean that the company is not doing well because the company might be in high risk. So that investors usually prefer low debt to equity ratio, Usually not more than 2.

Debt ratio:

Similar to Debt to equity ratio there is a ratio called as debt ratio where Total debts are divided by total assets. This also should not be more than 2. This discloses on how far the assets are used to cover the debts. As the ratio gets higher that would mean the company has leveraged using its debts Which is risky. When it has a low ratio the risk will be low but also the leverage of the company is low.

Debt ratio= Total Liabilities / Total assets

Interest coverage ratio:

This says how far the company is having sufficient funds to pay the interest charged on long term debts

 Interest coverage ratio= Earning before interest and tax/total interest expenses

This ratio should be greater than 2 to be titled as a good company.

Debt to capital ratio:

This ratio discloses how far the capital is sourced from debts.

Debt to capital ratio= Total liabilities/Total liabilities +total shareholder’s equities

In case of a good company, it is said that the ratio should not exceed 1.5.

1 Comment

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s