Keep an eye on the business liabilities of a company | Value Research Evaluating the business liabilities and balance sheet assets of a company can unearth important details

Keep an eye on the liabilities

Evaluating the liabilities of a company can unearth important details

Just like the asset side of the balance sheet is classified into current and non-current assets, the liabilities side is also classified into current liabilities and non-current liabilities of a company. If a liability is due within 12 months or within a company's regular operating cycle, it is classified as a current liability. Any other liability which does not fall under current liabilities of a company is classified as a non-current liability.

A rule of thumb is that a company should have enough resources to cover all its current liabilities. Another useful principle is that while it is better for companies to have lower overall debt, long-term debt is preferable to short-term debt because of the lower obligation to make payments in the near future. Therefore, be cautious of companies that have high current liabilities.

Like assets, sometimes it is difficult to precisely classify a liability in either of the two buckets. It could be the case that even though a debt payment is only due at a much later point in time, the occurrence of certain events accelerates the repayment schedule. In such cases, the balance-sheet classification of current and non-current could be misleading.

Case in point: SpiceJet
SpiceJet reported current liabilities of Rs 2,470 crore in March 2017. This figure jumped to Rs 9,403 crore in September 2021. The COVID-led disruption has been especially brutal for services companies, including airlines. It is likely that the current liabilities will further go up, putting a question mark on the airline's survival.

Also in the series:

Look at the EPS, not just profits

Net profits can be misleading

Which is better: ROE or ROCE?

How to value an enterprise

What is the cash conversion cycle? Why does it matter?

Why free cash flow is king

Why you should check the current assets

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