debt is a class of liabilities or obligations that the company must meet. This liability is divided into short-term and long-term debt, the difference is the maturity period, where if it is less than one year it is a short-term debt, while if it is more than one year it is a long-term debt.HTML Code:[COLOR="black"]Short-term debt is debt of an organization or company with a maturity period of less than one year . In a company's balance sheet,[/COLOR]
The term short-term debt is not only aimed at the true meaning of debt. In financial terms, if there is an obligation that must be paid by the company within the next one year, it will be classified as short-term debt. The following are the types of short-term liabilities of a company:
Accounts payable , companies borrow money for business capital or working capital, and must be paid along with interest, for example borrowing money from banks.
Dividend payable , companies that earn profits and must share their profits with their investors, then this obligation becomes dividend payable.
Income received in advance , this obligation is not in the form of payment of money, but in the form of goods or services. This happens when there are consumers who pay for goods/services while the goods purchased by consumers have not been given/shipped by the company.
Tax liability . Companies must pay taxes to the tax agency.
Accounts payable . Debts incurred due to the company's business activities or operations, for example debts to suppliers of raw materials that have not been paid. Another example is the payment of rent for a business place that has not been paid.
Obligation to pay wages . Payment of employee salaries/wages are also usually classified as short-term debt.
Payment of long-term debts that are due . Long-term debt can turn into short-term debt if it happens that in the current period the long-term debt is due. For example, there is a long-term debt taken by the company in 2016 for 5 years, then in 2021, the debt will turn into short-term debt.
There are short-term debt whose value can be estimated, some of which have not. For a certain value, for example, accounts payable, payment of salaries, installments of debt to banks. As for short-term debt, such as payment of taxes and dividends, the value usually cannot be estimated.
Short-term debt can also be used as an indicator to assess the company's financial health. Company debt, especially short-term debt can assess the level of company liquidity. One of the liquidity indicators that can assess this is the current ratio .
Current ratiocalculated by comparing the amount of current assets to the amount of short-term debt. A current ratio value above 1 means that the company will be able to pay all its short-term debt, and it means that the company has good liquidity. While the current catio value is below 1, it means that the company's liquidity is bad because the company will not be able to pay its short-term debt. This means that the company is in a bad financial condition and has the potential to release their assets.
For a short-term investor, the company's liquidity value is important, because mathematically, only companies that have a current ratio value above 1 have a probability of making a profit in the current period. Higher value of current ratio it will be even better, because it means that the company's liabilities are smaller when compared to the value of its assets.