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 debt, 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.
Calculating the Current Portion
An analyst should attempt to find information to build out a company’s debt schedule. 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.
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 flow perspective, there is no impact on whether debt is classified as a current liability or non-current liability. In financial modeling, 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.
To learn more, check out CFI’s financial modeling courses.
Learn more about the Balance Sheet
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