Noncurrent Liabilities

Noncurrent liabilities, also called long-term liabilities, are long-term financial obligations listed on a company’s balance sheet that are not due for settlement within one year – as opposed to current liabilities which are short-term debts.

Noncurrent liabilities are compared to a cash flow, to see if a company will be able to meet its financial obligations. 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 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 periodic debt interest payments, gauges whether enough income 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.

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. 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 12 months.

When reporting a capital lease as an asset on the balance sheet, payments due after one year are noncurrent liabilities. Warranties covering more than a one-year period are also recorded as noncurrent liabilities. Other examples include deferred compensation, deferred revenue, derivatives and certain health care liabilities.

Debt that is due within 12 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. Because current liabilities are broken down, noncurrent liabilities can be calculated by subtracting current liabilities from total debt.