Long-term debt refers to any debt that is due for payment over a period of more than one year from the date of the balance sheet. It includes any loans, bonds, or other debt instruments that a company has issued or borrowed, and that have a maturity date more than 12 months from the date of the balance sheet.
Long-term debt is a common way for companies to raise capital to finance their operations, expansion, or investment in long-term assets such as property, plant, and equipment. Long-term debt typically carries a fixed interest rate and requires periodic interest payments, with the principal amount due at maturity.
Examples of long-term debt may include:
Long-term debt is reported on a company's balance sheet, along with other liabilities such as accounts payable and accrued expenses.
Company XYZ borrows $1 million from a bank to finance the purchase of a new factory. The loan has a fixed interest rate of 4% and a repayment period of 10 years. The company's balance sheet shows the following information:
The long-term debt on the company's balance sheet would be $1 million, representing the amount of the loan that is due for payment over a period of more than one year. This would be classified as a liability on the balance sheet, along with any other long-term debt or bonds that the company has issued or borrowed.
The interest on the loan would also be reflected on the company's income statement, which shows its revenues, expenses, and profits over a given period of time. The interest expense on the loan would be calculated as follows:
Interest Expense = Loan Amount x Interest Rate
Interest Expense = $1,000,000 x 0.04 = $40,000 per year
The interest expense would be recorded as an expense on the income statement, reducing the company's net income and profits. The loan principal would be repaid over the 10-year period, with a portion of the loan principal and interest due each year.
Overall, long-term debt is an important metric for investors and analysts to evaluate a company's debt profile and financial health, as it can impact a company's creditworthiness, cost of capital, and cash flow.