# How To Calculate Long Term Debt

When reviewing a company's balance sheet, long term debt is the sum of long term liabilities which don't expire or mature for more than one year following the date of the company's balance sheet.

Calculating long term debt is simple and only requires adding up all outstanding long term liabilities.  Common examples of long term liabilities are long term bank loans, bond repayment, leases and warranties payable.  Once all long term liabilities are known, outstanding long term debt can be defined and reflected on a balance sheet.

Before investing in or lending to a company it is common practice to analyze the company’s balance sheet and understand their long term debt.  The first way an investor or lender will consider long term debt is to determine how the long term debt is currently or in the future will be affecting the company’s cash flow.  Most forms of long term debt come with monthly payments like a mortgage or lease payment.  It must be understood whether the long term debt payments will increase or decrease in the future.  If a bank loan is set to pay off within the next few years, the borrower’s future cash flow will increase.

The second way long term debt is considered when analyzing a company is determining when the long term debt is set to mature or refinance.  If over 20% of a company’s long term debt is set to refinance in any 12 month period it will be a risk to any investor or lender.  In today’s marketplace, lending institutions are less likely to refinance outstanding debt and may require the borrower to infuse more capital, refinance at a higher rate or pay off the long term debt entirely.  In many situations, refinancing long term debt could decrease a company’s cash flow or cause them to invest additional capital to pay down the note.  In situations where the borrower does not have the capital to invest, they can be forced into insolvency.

Finally, an investor or potential lender should determine the company’s debt to equity ratio.  This is calculated as taking total debt (long and short term) divided by a company’s net worth.  If the debt to equity ratio is over 40%, the company should be reviewed more carefully as they may have liquidity issues.  Understanding the company’s seasonality and business will be needed when deciding whether the debt to equity ratios are acceptable.