Long term debt refers to the obligations a company owes that are due beyond one year from the present date. This type of debt could be things like bonds, leases, or other types of loans that are not due in the immediate future. Companies often use long term debt for significant expenses, such as investing in new business opportunities or large capital projects. How a company manages its long term debt can have a significant impact on its financial health and stability.
1. What is an example of long term debt?
An example of long term debt is a mortgage loan. If a business purchases a property and pays for it through a 15 or 30 year mortgage, the mortgage is classified as long term debt.
2. Why do companies take on long term debt?
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Companies generally take on long term debt to finance ongoing operations, acquisitions, or to invest in long term growth opportunities. It helps businesses to expand without diluting company shares or ownership.
3. Is long term debt good or bad?
It depends on the situation. If long term debt allows a company to grow and earn more than the debt costs, it can be good. However, if the company cannot manage the debt or if it is unable to generate sufficient returns, it could become a financial burden leading to insolvency.
4. How is long term debt different from short term debt?
Short term debts are due within a year, while long term debts extend beyond a year. Examples of short term debt are accounts payable or short-term bank loans. Long term debts typically include loans like mortgages or bonds.
5. What is long term debt to equity ratio?
The long term debt to equity ratio is a financial metric that shows a company’s financial leverage. It indicates the proportion of equity and debt a company uses to finance its assets. A high ratio suggests a company has been aggressive in financing growth with debt, which can result in volatile earnings.