hello everyone hi welcome to the channel
of WallStreetmojo friends today we’re going to learn a concept which is your
financial liabilities we are going to understand the definition types ratios
few examples so let’s begin see financial liability for a business are
like you know the credit it’s it’s like a credit card for an individual in a
very simple term if I say it’s it’s like a credit card now they are useful in the
sense that the company can use such in the sensor you know they can employee the other money in order to finance its own business related activities for some
time period which you know lasts only when the liability becomes due one
should be mindful that you know the more or the excessive financial liability or
fin liability can put a dent on the balance sheet and can take the company
on the verge of a bankruptcy so it’s very important for the financial
analysts and the investors to be aware that you know what they are in how they
impact company’s financial position so this thing must be taken care of now
what are the financial liabilities the financial liability as a definition is
like you know any future sacrifices of economic benefit that the entity
requires to make as a result of its past transactions or any other activity in
the past the future sacrifices to be made by the entity can be in the form of
you know any money or services to the other party so financial liability
may be usually be like you know legally enforceable due to an any agreement that
has been signed up between the two entities but they are not always
necessary legally enforceable second you know they can be based on equitable
obligation like a duty based on ethical or moral consideration or can also be
binding on the entity as a result of such the construction obligation which
means you know an obligation that is implied by a set of circumstances in
particular situation as opposed to contractually based obligations third the financial liabilities basically
includes like a debt payable and interest payable which are as a result
of use of other’s money in the past which accounts to accounts payable to
other parties we as a result of the past purchases like
you know the rent or the lease payable to the space owners which are as a
result of the of the use of the other’s property in the past and in several
taxes people which are as a result of the business carried on in the past so
almost all the financial liabilities can be found listed on the balance sheet of
the entity now what exactly is the importance of for
liabilities and the impact of the business see although the liabilities
are essentially future obligations they are nonetheless a vital aspect of the
company’s operation because you know they are used to finance operations and
pay the large expansion so first is you know liability also makes business
transactions more efficient and in order to carry out for instance you know if a
company needs to pay every little purchased quantity every time the
material is delivered it would require several repetitions you can say that of
the payment process with a short time span on the other hand if the company
gets built for all its purchases from a particular supplier over a month or a
quarter it would be clear that you know all the payment owed to the supplier in
a very limited number of transactions you know one need to know one needs to
note here that you know they all have a date of maturity a stated or implied on
which they come to you so once liability comes duty can be determined
determinable for the business and defaulting or dealing the payment of the
liability may add up more liabilities so further any such act can also damage the
reputation of the company and the ad they can affect the extent to which it
will be able to use that are those money in the future no there are some more
types there are some types of financial liabilities liabilities are classified
into two types based upon the time period within which they become due and
are liable to be paid to the creditors the based on this criteria there are two
types of liabilities one is called the short term or the current liabilities
and the other one is called the long term liabilities no short term or the
current liabilities me here shorter when the current liabilities are
those that are payable within less than 1 year of our timespan okay which is
like next 12 months from the time the economic benefit is received by the
company on the other hand if you see the long term liabilities the liability that
belongs to the current are called the they are basically known as
your current liabilities or it is known as your short-term liabilities like for
example if a company has to pay early rent by what you are occupying a land or
an office space then that trend will be categorized under the current or the
short-term liability the interest payable and the in that part of the
long-term debt which is payable within the current year will come under the
short-term liability okay now the long-term liabilities are those ones
that are payable over the period of time like which is greater than 12 months
or 1 year like for example if a business takes out a mortgage payable
over a 15 years period it will come under the the long term liabilities
15 years has too much time so it will come under the long term
liabilities and similarly all the debt that is not required to be paid within
the current year will also be categorized as the long term liabilities now let’s understand the long term and the short term liability in more detail seen
for most of the companies the long term liability comprises of mostly the long
term debt which is often payable over the period I mean even longer for a
ticket so the other items that can be classified the long term liability that
includes like debentures they have thing called loans they have such thing calls
deferred tax liabilities and pension obligation so on the other hand there
are so many items other than the interest and the current portion of the
long-term debt that can be written under these short term liabilities like the
other short term liabilities with that includes like the payroll expenses
accounts payable which we call as the creditors which includes you know the
money owed to the vendors monthly utilities and similar expenses you know
so in a case so in case of company has a short term liability which it intends to
refinance some confusion is likely to arise in your mind you know regarding
its classification and clear this confusion it is it is required to
identify whether there is any intent whether there is intent to refinance and
also whether the process of the refinance has begun
if yes and if the refinance short term liabilities that are going to become new
over the next 12 months due to refinancing they will be classified as
the long term liabilities there are some of the financial ratios that have been
used to analyze this kind of financial liabilities the first and the foremost
ratio that can be used is the debt which is your debt divided by equity and
such ratio should be in a maintained situation then there is a thing called
what we say the debt ratio that sorry the debt to equity ratio forces the debt
ratio second is the debt to equity ratio this other the matrix that can be used
which is your total debt divided by your shareholders equity then we have the
third ratio that can be used is the capitalization ratio or the cap ratio
which we call which is your long-term debt divided by your long-term debt plus
shareholders equity the fourth one is what you can use is the uses the cash
flow to the total debt the ratio this ratio is basically basically your
operating cash flow your ops cash flow to your debt that is total debt divided
by total debt right the fifth ratio that you can use for analysis is the interest
coverage ratio now this ratio is basically you’re EBIT
divided by the interest expense sixth one is the current ratio and the quick
ratio the current ratio is your current assets divided by current liabilities
and your quick ratio is you don’t need to deduct some of the things like you
know from the current assets you need to deduct your inventories and the total
current liability will remain the same there will be no change in that this
will the ratios that can be used and based on that you know the analysis of
the ratios can be done with the help of the examples so on a conclusion note
there is no single method for analyzing the financial liabilities as we saw from
this particular ratios however finding out the meaningful ratios and comparing
them with the other companies is one well-established and recommended method
for the purpose of deciding over the investing in the company so there are
certain traditionally defined ratios for this purpose but you can very well come
up with your own ratios depending on the important word purpose of the analysis
thank you everyone for joining the session