What is Current Debt?
Current debt includes the formal borrowings of a company outside of accounts payable. This appears on the balance sheet as an obligation that must be paid off within a year’s time. Thus, current debt is classified as a current liability. This is not to be confused with the current portion of long-term debt, which is the portion of long-term debt due within a year’s time.
Not all companies have a current debt line item, but those that do use it explicitly for loans incurred with a maturity of less than a year. Some firms call this “notes payable”. This differs from accounts payable, as accounts payable refers to goods or services purchased on credit. Notes payable, on the other hand, refers to funds or cash borrowed.
The Current Ratio
Current debt is often assessed using the current ratio. The current ratio is a liquidity metric that compares current assets to current liabilities. This ratio is used to gauge the ability of a company to handle its financial obligations for the next year. If a company has current assets of $500,000 and current liabilities of $250,000, then it has a current ratio of 2:1. Generally speaking, a company should always have a current ratio of at least 1:1 or higher to indicate that it is financially sound. A ratio of less than 1:1 indicates the company has more financial obligations than its current assets can cover.
To get a good reading of a company’s relative financial stability, it is best to compare its current ratio to the average current ratio of similar companies operating in the same industry. You can also compare it to the company’s own current ratio in previous years, to identify whether the company is trending toward a higher or lower ratio.
We hope this guide has been helpful in your understanding of current debt and financial statements. To continue learning about the balance sheet please see these additional CFI articles that will help to increase your knowledge: