Financial Liabilities | Definition,Types | Ratios - YouTube

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