Current portion of long‐term debt

The current portion of long‐term debt represents cash outflows that companies must pay within one year from the balance sheet date. If having no enough money, the company has a high risk of default.

Definition of the current portion of long‐term debt

The current portion of long‐term debt is the principal portion of long-term debt that will mature in the current year. In the financial statements, the company reports it on current liabilities.

Take an example. 

A company has a long-term debt of Rp100 from a bank. Of the total, Rp10 will mature in December this year, and the rest will mature next year. So, for example, for the June financial statements this year, the company recorded Rp10 as the current portion of long-term debt. For the remaining principal, the company recorded it as long-term debt in non-current liabilities.

Why you should check it

Debt represents the potential cash outflow from the company, so the company put it in the liabilities section. And, if the company has a lot of debt due in the current year, it means it has to spend big cash. Of course, it’s difficult if the company is in cash poor.

Creditors often look at the account and compare it with the company’s cash position. Inadequate cash makes the company vulnerable to default. When money is not enough, creditors are reluctant to offer more loans to companies.

In concluding whether the company can pay or not, you should check not only the cash and cash equivalent account but also the source of the cash inflows. They can be from:

• Converting product inventory in the warehouse into sales. How long does the company convert inventory to cash? Does the sale generate money or credit? How much money does the company make from sales and overall operating activities? Those are some crucial questions that you need to answer.
• Capital injections from shareholders. For example, a company might issue new shares.
• Taking a new loan with a longer tenor. But, this option depends on the level of leverage (debt) of the company. If the company already has substantial debt, taking a new loan is an impossible option. Creditors are usually unwilling to lend money.
• Collecting money from customers’ accounts receivable. What you need to observe is how much the receivables are and how long the average company can collect them.
• Deferring payment for purchases of goods from suppliers. You should see how long the average company pays its suppliers? And how long does the supplier provide a credit extension?