What is a Noncurrent Liability?
A noncurrent liability is the one that is not due for settlement within a period of one year. Such liabilities are listed separately in a balance sheet, away from current liabilities.
The aggregate of noncurrent liabilities is regularly compared with the cash flow of a business to verify if the business has enough financial resources to fulfil its obligations over the long term. If there are not enough financial resources available, creditors may not lend capital to run the business, and investors may lose interest.
The important factor here is to evaluate the stability of a business's cash flow. Stable cash flows are believed to support a higher debt load with a reduced risk of default.
Understanding Noncurrent Liabilities
Noncurrent liabilities are also called long-term liabilities or long-term debts. Long-term investors use noncurrent liabilities as a factor to determine if a company is using excessive leverage. They use various financial ratios to assess leverage and liquidity risk.
A company's total debt is compared with total assets, debt ratio, to understand the level of leverage. A lower percentage denotes that the company is less leveraged and its equity position is stronger. A higher ratio denotes a higher financial risk of the company.
There are other variants, such as long-term debt to total assets ratio and the long-term debt to capitalisation ratio. They divide the noncurrent liabilities by the capital available.
Examples
Debentures, long-term loans, deferred tax liabilities, bonds payable, long-term lease contracts, and pension benefit obligations are examples of noncurrent liabilities.
