Current Portion of Long Term Debt
Long term debt will have a maturity of more than one year. This can be anywhere from two years, five years, ten years or even thirty years. The current portion of long term debt is the amount of principal and interest of this amount due within one year’s time.
This is not to be confused with current debtCurrent DebtOn a balance sheet current debt is the portion of debt due withing a year (12 months) and is listed as a current liability and part of net working capital. Not all companies have a current debt line item, but those that do use it explicitly for loans that were incurred with a maturity of less than a year., which are loans with a maturity of less than one year. Some firms will consolidate the two amounts into a generic current debt line item on the balance sheet.Balance SheetThe balance sheet is one of the three fundamental financial statements. These statements are key to both financial modeling and accounting. The balance sheet displays the company’s total assets, and how these assets are financed, through either debt or equity. The balance sheet: Assets = Liabilities + Equity
Calculating the Current Portion
An analyst should attempt to find information to build out a company’s debt schedule.Debt ScheduleA debt schedule lays out all of the debt a business has in a schedule based on its maturity and interest rate. In financial modeling, interest expense flows into the income statement, closing debt balance flows onto the balance sheet, principal repayments flow through the cash flow statement, completing the scheudle This schedule outlines the major pieces of a debt a company is obliged under, and lays it out based on maturity, periodic payments, and outstanding balance. Using the debt schedule, an analyst can measure the current portion of long term debt a company owes.
Example
Borrower Inc. takes on a five year loan for $5,000,000. The loan terms specify equal principal payments over the five years. The current portion of this long term debt is $1,000,000 (excluding interest payments).
Reducing Current Portion of Long Term Debt
A company reduces this line item by making payments towards the debt. As payments are made, the cash account decreases but the liability side decreases an equivalent amount.
Alternatively, a company with good credit standing can “roll forward” current debt, by taking on more credit to pay this loan off. If the new credit taken on is long term, the current debt is effectively rolled into the future.
Applications in financial modeling
From a cash flowValuationThe current portion of long term debt is the portion of long-term debt due that is due within a year’s time. Long-term debt has a maturity of more than 1 year. The current portion of long-term debt differs from current debt which is debt that is to be totally repaid within one year. perspective, there is no impact on whether debt is classified as a current liability or non-current liability. In financial modelingWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company's financial performance. Overview of what is financial modeling, how & why to build a model. A 3 statement model links income statement, balance sheet, and cash flow statement. More advanced types of financial models are built for valuation, plannnig, and, it may be necessary to produce a full set of financial statements, including a balance sheet where the current portion of long term debt is shown separately. This is simply to tie the numbers to what the accountant will produce. There is no impact on valuation by how the debt is categorized.
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Learn more about the Balance Sheet
Thank you for reading this guide and examples of how to assess the current portion of long term debt on a company’s balance sheet. CFI’s mission is to help you advance your career. To keep learning and developing your knowledge we highly recommend these additional resources.
- Intangible AssetsIntangible AssetsAccording to the IFRS, intangible assets are identifiable, non-monetary assets without physical substance. Like all assets, intangible assets are those that are expected to generate economic returns for the company in the future. As a long-term asset, this expectation extends for more than one year
- Bonds PayablesBond PayablesBonds payable are generated when a company issues bonds to generate cash. Bonds Payable refers to the amortized amount that a bond issuer holds on its balance sheet. Bonds payable are considered a long-term liability and are
- PP&EPP&E (Property, Plant and Equipment)PP&E (Property, Plant, and Equipment) is one of the core non-current assets found on the balance sheet. PP&E is impacted by Capex, Depreciation and Acquisitions/Dispositions of fixed assets. These assets play a key part in the financial planning and analysis of a company’s operations and future expenditures
- Cash and EquivalentsCash EquivalentsCash and cash equivalents are the most liquid of all assets on the balance sheet. Cash equivalents include money market securities, Bankers Acceptances, Treasury bills, commercial paper, and other money market instruments.
