Liabilities: What the Company Owes#

Liabilities represent the company's obligations—what it owes to others. Understanding liabilities helps you assess financial risk and stability.

Like assets, liabilities are divided into current (due within one year) and non-current (due beyond one year). This distinction is crucial for assessing both liquidity and long-term solvency.

Current Liabilities#

Current liabilities are obligations due within the next year. They require attention to ensure the company can pay its bills.

Accounts Payable#

Money owed to suppliers for goods and services received but not yet paid.

What to Look For	Meaning
Payables increasing	Company taking longer to pay suppliers
Payables decreasing	Paying faster or ordering less
High payables relative to COGS	Long payment terms (good for cash flow)

Free Financing

Accounts payable is essentially interest-free financing from suppliers. Companies often try to extend payment terms to improve cash flow.

Short-term Debt#

Borrowings due within one year, including:

Bank loans and lines of credit
Commercial paper
Current portion of long-term debt (this year's principal payments)

Refinancing Risk

Short-term debt must be paid or refinanced soon. If credit markets tighten, a company heavily dependent on short-term financing could face problems.

Accrued Expenses#

Expenses incurred but not yet paid:

Employee wages earned but not yet paid
Interest accrued but not yet due
Taxes owed but not yet paid
Utilities used but not yet billed

Deferred Revenue (Unearned Revenue)#

Money received for goods or services not yet delivered.

Example: A software company receives a $120,000 annual subscription payment upfront. It records:

$120,000 cash (asset)
$120,000 deferred revenue (liability)

Each month, $10,000 moves from deferred revenue to recognized revenue.

Growing deferred revenue is often a good sign—it means customers are prepaying for future services. It's a liability because the company "owes" the service.

Other Current Liabilities#

May include:

Customer deposits
Short-term lease obligations
Warranty reserves
Litigation provisions

Non-Current Liabilities#

Non-current liabilities are long-term obligations that extend beyond one year.

Long-term Debt#

The biggest item for most companies—debt due after one year:

Bank term loans
Corporate bonds
Mortgages
Private placements

Key Debt Metrics#

Metric	Formula	What It Shows
Total Debt	Short-term + Long-term debt	Overall borrowing
Net Debt	Total Debt - Cash	Debt after accounting for cash
Debt-to-Equity	Total Debt ÷ Shareholders' Equity	Leverage level
Debt-to-EBITDA	Total Debt ÷ EBITDA	Years to pay off debt

Understanding Debt Structure#

Look beyond the total to understand the structure:

Factor	What to Examine
Maturity schedule	When does debt come due? Concentrated or spread out?
Interest rates	Fixed or variable? What rates?
Secured vs. unsecured	What assets back the debt?
Covenants	What restrictions does debt impose?

Debt Maturity Wall

A "maturity wall" occurs when large amounts of debt come due around the same time. This creates refinancing risk—the company must find new financing or pay off the debt.

Lease Liabilities#

Under current accounting rules, most leases appear on the balance sheet:

Right-of-use assets (on the asset side)
Lease liabilities (on the liability side)

This makes companies with significant leases (retailers, airlines) appear more leveraged than under old rules.

Pension Obligations#

For companies with defined benefit pension plans:

Pension liability represents unfunded promises to employees
Can be significant for older industrial companies
Watch for underfunded pension obligations

Deferred Tax Liabilities#

Taxes that will be paid in the future due to timing differences in how income is reported for accounting vs. tax purposes.

Analyzing Liabilities#

Debt Levels: How Much is Too Much?#

There's no universal answer—it depends on:

Factor	Higher Debt Tolerance
Stable, predictable cash flows	Higher
Cyclical or volatile business	Lower
Asset-heavy with collateral	Higher
Growth company needing flexibility	Lower

Industry Benchmarks#

Compare debt levels to peers:

Industry	Typical Debt-to-Equity
Utilities	1.0 - 2.0
Telecom	1.0 - 2.0
Real Estate	0.8 - 1.5
Manufacturing	0.5 - 1.0
Technology	0.1 - 0.5

Good Debt vs. Bad Debt#

Not all debt is problematic:

Acceptable debt:

Funds productive assets
Interest rate below return on investment
Manageable maturity schedule
Provides tax benefits

Concerning debt:

Funds operations (cash flow issues)
High interest rates
Concentrated maturities
Tight covenants at risk of breach

Working Capital#

Working capital is a key liquidity measure:

Working Capital = Current Assets - Current Liabilities

Scenario	Interpretation
Positive working capital	Company can cover short-term obligations
Negative working capital	May struggle to pay near-term bills
Growing working capital	Building liquidity cushion
Shrinking working capital	Potential liquidity stress

Exception: Negative Working Capital

Some businesses (like grocery stores) operate with negative working capital by design—they collect cash before paying suppliers. This isn't necessarily bad if the business model supports it.

Red Flags in Liabilities#

Red Flag	What It Might Mean
Rapidly increasing debt	Funding losses or aggressive expansion
High short-term debt	Refinancing risk
Debt maturity concentration	Upcoming cash crunch
Accounts payable growing rapidly	Cash flow problems
Covenant violations	Financial distress

Key Takeaways

Current liabilities are due within one year; non-current are longer-term
Accounts payable is interest-free supplier financing
Deferred revenue is often a positive sign—customers prepaying
Analyze debt structure: maturity schedule, rates, covenants
Working capital (current assets - current liabilities) measures short-term liquidity
Compare debt levels to industry peers
Watch for concentrated maturities and refinancing risk