Noncurrent Liabilities: Definition, Examples, and Ratios (2024)

What Are Noncurrent Liabilities?

Noncurrent liabilities, also called long-term liabilities or long-term debts, are long-term financial obligations listed on a company’s balance sheet. These liabilities have obligations that become due beyond 12 months in the future, as opposed to current liabilities, which are short-term debts with maturity dates within the following 12-month period.

Understanding Noncurrent Liabilities

Noncurrent liabilities are compared to cash flow, to see if a company will be able to meet its financial obligations in the long term. 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 its 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 debt interest payments for the same period, gauges whether enough income is 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.

Examples of Noncurrent Liabilities

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. Warranties covering more than a one-year period are also recorded as noncurrent liabilities. Other examples include deferred compensation, deferred revenue, and certain healthcare liabilities.

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, which are classified as the current portion of long-term debt. 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.

The Bottom Line

Noncurrent liabilities are long-term financial obligations listed on a company’s balance sheet. These liabilities, also called long-term liabilities or long-term debts, have obligations that become due beyond 12 months in the future.