Long-Term Debt


DEFINITION of 'Long-Term Debt'

Long-term debt consists of loans and financial obligations lasting over one year. Long-term debt for a company would include any financing or leasing obligations that are to come due in a greater than 12-month period. Long-term debt also applies to governments: nations can also have long-term debt.

In the U.K., long-term debts are known as "long-term loans."


Loading the player...

BREAKING DOWN 'Long-Term Debt'

Financial and leasing obligations, also called long-term liabilities, or fixed liabilities, would include company bond issues or long-term leases that have been capitalized on a firm's balance sheet. Often, a portion of these long-term liabilities must be paid within the year; these are categorized as current liabilities, and are also documented on the balance sheet. The balance sheet can be used to track the company's debt and profitability.

On a balance sheet, the company's debts are categorized as either financial liabilities or operating liabilities. Financial liabilities refer to debts owed to investors or stockholders; these include bonds and notes payable. Operating liabilities refer to the leases or unsettled payments incurred in order to maintain facilities and services for the company. These include everything from rented building spaces and equipment to employee pension plans. For more on how a company uses its debt, see Financial Statements: Long-Term Liabilities.

Bonds are one of the most common types of long-term debt. Companies may issuing bonds to raise funds for a variety of reasons. Bond sales bring in immediate income, but the company ends up paying for the use of investors' capital due to interest payments.

Why Incur Long-Term Debt?

A company takes on long-term debt in order to acquire immediate capital. For example, startup ventures require substantial funds to get off the ground and pay for basic expenses, such as research expenses, Insurance, License and Permit Fees,  Equipment and Supplies and  Advertising and Promotion. All businesses need to generate income, and long-term debt is an effective way to get immediate funds to finance and operations. 

Aside from need, there are many factors that go into a company's decision to take on more or less long-term debt. During the Great Recession, many companies learned the dangers of relying too heavily on long-term debt. In addition, stricter regulations have been imposed to prevent businesses from falling victim to economic volatility. This trend affected not only businesses, but also individuals, such as homeowners.

Long-Term Debt: Helpful or Harmful?

Since debt sums tend to be large, these loans take many years to pay off. Companies with too much long-term debt will find it hard to pay off these debts and continue to thrive, as much of their capital is devoted to interest payments and it can be difficult to allocate money to other areas. A company can determine whether it has accrued too much long-term debt by examining its debt to equity ratio.

A high debt to equity ratio means the company is funding most of its ventures with debt. If this ratio is too high, the company is at risk of bankruptcy if it becomes unable to finance its debt due to decreased income or cash flow problems. A high debt to equity ratio also tends to put a company at a disadvantage against its competitors who may have more cash. Many industries discourage companies from taking on too much long-term debt in order to reduce the risks and costs closely associated with unstable forms of income, and they even pass regulations that restrict the amount of long-term debt a company can acquire.

For example, since the Great Recession, banks have begun to scrutinize companies' balance sheets more closely, and a high level of debt now can prevent a company from getting further debt financing. Consequently, many companies are adapting to this rule to avoid being penalized, such as taking steps to reduce their long-term debt and rely more heavily on stable sources of income.

A low debt to equity ratio is a sign that the company is growing or thriving, as it is no longer relying on its debt and is making payments to lower it. It consequently has more leverage with other companies and a better position in the current financial environment. However, the company must also compare its ratio to those of its competitors, as this context helps determines economic leverage.

For example, Adobe Systems Inc. (ADBE) reported a higher amount of long-term debt in Q2 of 2015 than it had in the previous seven years. This debt is still low compared with many of its competitors, such as Microsoft Corp. (MSFT) and Apple Inc. (AAPL), so Adobe retains relatively the same place in the market. However, comparisons fluctuate with competitors such as Symantec Corp. (SYMC) and Quintiles Transnational (Q), who carry a similar amount of long-term debt as Adobe.

A company's long-term debt may also put bond investors at risk in an illiquid bond market. The question of the liquidity of the bond market has become an issue since the Great Recession, as banks that used to make markets for bond traders have been constrained by greater regulatory oversight.

Long-term debt is not all bad, though, and in moderation, it is necessary for any company. Think of it as a credit card for a business: in the short-term, it allows the company to invest in the tools it needs to advance and thrive while it is still young, with the goal of paying off the debt when the company is established and in the financial position to do so. Without incurring long-term debt, most companies would never get off the ground. Long-term debt is a given variable for any company, but how much debt is acquired plays a large role in the company's image and its future.

Bank loans and financing agreements, in addition to bonds and notes that have maturities greater than one year, would be considered long-term debt. Other securities such as repos and commercial papers would not be long-term debt, because their maturities are typically shorter than one year.

  1. Long-Term Debt To Capitalization ...

    A ratio showing the financial leverage of a firm, calculated ...
  2. Short-Term Debt

    An account shown in the current liabilities portion of a company's ...
  3. Adjusted Gross Income - AGI

    A measure of income calculated from your gross income and used ...
  4. Par

    Short for "par value," par can refer to bonds, preferred stock, ...
  5. Audit

    An unbiased examination and evaluation of the financial statements ...
  6. EBITA

    Earnings before interest, taxes and amortization. To calculate ...
Related Articles
  1. Stock Analysis

    5 Things to Know About Planet Fitness Stock

    Learn about Planet Fitness and how it has achieved success. Understand five aspects of the company that have made it an attractive investment.
  2. Investing Basics

    Understanding Long-Term Debt

    Long-term debt is any debt or liability that is due in more than one year.
  3. Investing Basics

    Will Corporate Debt Drag Your Stock Down?

    Borrowed funds can mean a leg up for companies or the boot for investors. Find out how to tell the difference.
  4. Bonds & Fixed Income

    Corporate Bonds: An Introduction To Credit Risk

    Corporate bonds offer higher yields, but it's important to evaluate the extra risk involved before you buy.
  5. Investing

    In Search of the Rate-Proof Portfolio

    After October’s better-than-expected employment report, a December Federal Reserve (Fed) liftoff is looking more likely than it was earlier this fall.
  6. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  7. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  8. Investing

    The Pros and Cons of High-Yield Bonds

    Junk bonds are more volatile than investment-grade bonds but may provide significant advantages when analyzed in-depth.
  9. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  10. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  1. On which financial statements does a company report its long-term debt?

    A company lists its long-term debt on its balance sheet under liabilities, usually under a subheading for long-term liabilities. Long-Term ... Read Full Answer >>
  2. What is the short/current long-term debt account on a company's balance sheet?

    A lot of confusion can arise with this balance sheet account. After all, how can something be both long and short? Despite ... Read Full Answer >>
  3. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  4. Can personal loans be included in bankruptcy?

    Personal loans from friends, family and employers fall under common categories of debt that can be discharged in the case ... Read Full Answer >>
  5. Can working capital be depreciated?

    Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>
  6. What does high working capital say about a company's financial prospects?

    If a company has high working capital, it has more than enough liquid funds to meet its short-term obligations. Working capital, ... Read Full Answer >>

You May Also Like

Trading Center