Long Term Debt

What is Long Term Debt?

Long term debt is the debt taken by the company which gets due or is payable after the period of one year on the date of the balance sheet and it is shown in the liabilities side of the balance sheet of the company as the non-current liability.

In simple terms, Long term debts on a balance sheet are those loans and other liabilities, which are not going to come due within 1 year from the time when they are created. In general terms, all the non-current liabilities can be called long-term debts, especially to find financial ratios that are to be used for analyzing the financial health of a company.

Long-Term Debt Example

Below is a long-term debt example of Starbucks. We note that Starbucks debt increased in 2017 to $3,932.6 million as compared to $3185.3 million in 2016.

Long Term Debt Starbucks

source: Starbucks SEC Filings

Below is its breakup

Long Term Debt Starbucks Breakup

source: Starbucks SEC Filings

As we note from above, the company has issued various debt notes (2018 notes, 2021 notes, 2022 notes, 2023 notes, 2026 notes, and even 2045 notes)

Advantages

Pepsi’s Long-Term Debt Example

As we note from above, Pepsi’s long-term debt on the balance sheet has increased over the past 10 years. Also, its debt to total capital has increased over the corresponding period. It implies that Pepsi has been relying on debt for growth.

Long-Term-Debt-v1

Oil & Gas Companies Example

Oil and Gas Companies are capital intensiveCapital IntensiveCapital intensive refers to those industries or companies that require significant upfront capital investments in machinery, plant & equipment to produce goods or services in high volumes and maintain higher levels of profit margins and return on investments. Examples include oil & gas, automobiles, real estate, metals & mining.read more companies that raise large amounts of long-term debt on the balance sheet. Below is the Capitalization ratio (Debt to Total Capital) graph of Exxon, Royal Dutch, BP, and Chevron. We note that for all the companies, debt has increased, thereby increasing the overall capitalization ratioCapitalization RatioCapitalization ratios are a set of ratios that assist analysts in determining how a company's capital structure will affect if an investment is made in the company. The debt-to-equity, long-term debt-to-market-cap, and total debt-to-market-cap ratios are all included.read more.

Oil & Gas - Capitalization Ratio

source: ycharts

This increase in long-term debt on the balance sheet is primarily due to a slowdown in commodity (oil) prices and thereby resulting in reduced cash flows, straining their balance sheet.

PeriodBPChevronRoyal DutchExxon Mobil
31-Dec-1535.1%20.1%26.4%18.0%
31-Dec-1431.8%15.2%20.9%14.2%
31-Dec-1327.1%12.0%19.8%11.5%
31-Dec-1229.2%8.1%17.8%6.5%
31-Dec-1128.4%7.6%19.0%9.9%
31-Dec-1032.3%9.6%23.0%9.3%
31-Dec-0925.4%10.0%20.4%8.0%
31-Dec-0826.7%9.0%15.5%7.7%
31-Dec-0724.5%8.1%12.7%7.3%

source: ycharts

The Negative Impacts of high Long-Term Debt

Important Note for Investors

Conclusion

Long-term debt is the debt, which needs to be paid back to the lenders in more than one year from the time it is borrowed. It is helpful for companies because it provides some financial leverage if the company is able to generate enough cash flowsCash FlowsCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more to cover its interest costs. However, if the debt is too much compared to its operating cash flows, it invites trouble for the company as well as the shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more.

Therefore, an investor must study the debt and the changes happening in it carefully. It is a good practice to be informed about the purpose of any new debt issued or restructured and also the composition of the long-term debt. For getting those details, an investor must go through the notes to the financial statementsThe Notes To The Financial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more and the conference calls conducted periodically by the company he/she is interested in.

Long-Term Debt on Balance Sheet Video

 

This article has been a guide to what is long-term debt on the balance sheet. Here we discuss long-term debt examples along with its advantages and disadvantages. We also discuss the things that you must know as an investor about debt. You can also have a look at these articles below to learn more about accounting –