Long Term Debt (LTD) is any amount of outstanding debt a company holds that has a maturity of 12 months or longer. It is classified as a non-current liability on the company’s balance sheet. The time to maturity for LTD can range anywhere from 12 months to 30+ years and the types of debt can include bonds, mortgages, bank loans, debentures, etc. This guide will discuss the significance of LTD for financial analysts.
Long Term Debt on the Balance Sheet
Long Term Debt is classified as a non-current liability on the balance sheet, which simply means it is due in more than 12 months’ time. The LTD account may be consolidated into one line-item and include several different types of debt, or it may be broken out into separate items, depending on the company’s financial reporting and accounting policies.
When all or a portion of the LTD becomes due within a years’ time, that value will move to the current liabilities section of the balance sheet, typically classified as the current portion of the long term debt.
Below is a screenshot of CFI’s example on how to model long term debt on a balance sheet. As you can see in the example below, if a company takes out a bank loan of $500,000 that equally amortizes over 5 years, you can see how the company would report the debt on its balance sheet over the 5 years.
As shown above, in year 1, the company records $400,000 of the loan as long term debt under non-current liabilities and $100,000 under the current portion of LTD (assuming that portion is now due in less than 1 year).
In year 2, the current portion of LTD from year 1 is paid off and another $100,000 of long term debt moves down from non-current to current liabilities.
The process repeats until year 5 when the company has only $100,000 left under the current portion of LTD. In year 6, there are no current or non-current portions of the loan remaining.
Types of Long Term Debt
Long term debt is a catch-all phrase that includes various different types of loans. Below are some examples of the most common different types of long term debt:
Bank Debt – This is any loan issued by a bank or other financial institution and is not tradable or transferable the way bonds are.
Mortgages – These are loans that are backed by a specific piece of real estate, such as land and buildings.
Bonds – These are publicly tradable securities issued by a corporation with a maturity of longer than a year. There are various types of bonds, such as convertible, puttable, callable, zero-coupon, investment grade, high yield (junk), etc.
Debentures – These are loans that are not backed by a specific asset and, thus, rank lower than other types of debt in terms of their priority for repayment
Use of Leverage
When companies take on any kind of debt, they are creating financial leverage, which increases both the risk and the expected return on the company’s equity. Owners and managers of businesses will often use leverage to finance the purchase of assets, as it is cheaper than equity and does not dilute their percentage of ownership in the company.
To evaluate how much leverage a company has, a financial analyst looks at ratios such as: