How to Determine a Company’s Debt from Their Financial Statements

Determining a company’s debt is a critical aspect of understanding its financial health. This article will guide you through several methods to find and calculate a company’s total debt using their financial statements, specifically focusing on the balance sheet.

Introduction to Company Debt

Debt, in financial terms, refers to the money that a company owes to creditors, suppliers, or any other external party. Simply put, it is the financial obligation of a company that needs to be paid back in the future. Debt can be short-term (current liabilities) or long-term (long-term liabilities).

Using the Balance Sheet to Find Company Debt

The balance sheet, one of the primary financial statements, is a document that provides a snapshot of a company's financial position at a specific point in time (usually the end of an accounting period). This document is divided into three main sections: assets, liabilities, and shareholders' equity. By examining the liabilities section, you can determine the company's total debt.

Locating Debt in the Balance Sheet

When reviewing the balance sheet, you will find the liabilities section, which typically categorizes debts into two categories: current liabilities and long-term liabilities.

Current Liabilities: These are obligations that the company must pay within one year or one operating cycle, whichever is longer. Examples include accounts payable, short-term loans, bank overdrafts, and accrued liabilities. Long-term Liabilities: These are obligations that the company must pay after one year. Examples include long-term loans, bonds payable, and mortgages.

Calculating Total Debt

To calculate a company's total debt, you need to add the values of both current and long-term liabilities. The formula for determining total debt is:

Total Debt Long-term Liabilities Current Liabilities

Examples of Long-term Liabilities

Long-term liabilities include various financial instruments and obligations that the company has borrowed. These can include:

Secured loans Unsecured loans Debentures Long-term loans from banks and financial institutions Mortgage loans

Examples of Current Liabilities

Current liabilities are the immediate financial obligations the company must pay within one year and can include:

Accounts payable Short-term loans Banks overdraft or cash credit Tax provisions and arrears Employee accrued salaries and wages Amounts payable to suppliers and creditors Other accrued expenses such as interest

Conclusion

Understanding a company’s debt is crucial for investors, creditors, and other stakeholders. By mastering how to find and calculate the total debt from the balance sheet, you can gain valuable insights into the company's financial health and long-term sustainability.

To ensure the information is up-to-date and relevant, consult the latest balance sheets and financial statements provided by the company or via public records from the ROC (Registration of Companies office).

Remember, while the balance sheet is a valuable tool, it is always beneficial to conduct further research and analysis to get a comprehensive understanding of a company's financial situation.