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Company debt that takes more than one year to pay off.[sc:kit03 ]
Explanation of Long Term Debt
Also called Long-Term Liabilities, or Non-Current Liabilities and listed on the Balance Sheet, this figure represents the company’s debt that will take more than one year to pay off. Examples of Long Term Debt includes mortgages, Lease Payments, pensions among others.
Importance of Long Term Debt
Long Term Debt is a factor for most companies, as most do not simply have the cash to purchase long term assets like buildings and expensive production equipment. These companies then have to acquire mortgages to pay for these big-ticket items, or lease them. As an incentive for employees to remain with the company for long periods of time, companies will offer pension plans to their employees. This continual liability is also considered to be long term.
Companies with low or no Long Term Debt may be considerably financially healthier than counterparts burdened under heavy Long Term Debt loads. However, a company who takes on Long Term Debt to purchase assets that in the long run become key to the growth of the company would in fact be favorable. So, finding out what comprises the Long Term Debt of a company is very important – there should be notes in the financial statement describing what makes up their Long Term Debt.
Short Term Debt are company debts that a company must pay within one year. Investors should keep an eye on both short term and long term company obligations.