Long term liabilities

Long term liabilities are those that are due to be paid in more than an year. Those due in less than a year or on demand are current liabilities.

The most important type of long term liability is debt. Preference shares are not debt, but given that they are "debt like" this is often something investors should adjust for.

Similarly, some short term debt can keep being renewed, so it in fact provides long term funding. This sometimes happens with overdrafts: they are repayable on demand and therefore short term debt, but a company may maintain an overdraft for many years.

Conversely debt instruments that originally had a long term that are now close to expiry are short term debt, and shown as such in the accounts.

Long term liabilities are looked at by investors assessing a company's financial health using ratios such as interest cover. Because of gearing high debt enhances the benefits of growth.

Like shareholders, the holders of long term debt (i.e. banks and bondholders) are suppliers of funds to a company. They rank higher than shareholders in getting their money back if a company fails and therefore their money is safer, but they do not gain if the company performs better than the minimum necessary to pay back its debt.

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