Balance Sheet Foundations
Long-Term Debt
Long-term debt is borrowed money that is repayable after more than one year. It is used to fund assets, expansion, acquisitions, or long operating-cycle needs, and it creates scheduled obligations for interest and principal repayment.
Concept First
Learn It Step By Step
Start with the business meaning, then move into the formula.
What is Long-term Borrowings?
Long-term Borrowings is an input to Long-Term Debt. The line item should match the lesson definition, belong to the same period, and use a consistent unit before calculation. Example: use the matching financial statement line item for the same period and keep the unit consistent before calculating.
What is Principal?
The debt amount that must be repaid, separate from interest. DSCR and debt service analysis must consider both. Example: use the matching financial statement line item for the same period and keep the unit consistent before calculating.
What is Interest?
Interest is an input to Long-Term Debt. The line item should match the lesson definition, belong to the same period, and use a consistent unit before calculation. Example: finance cost paid or payable on bank loans, term loans, or debentures.
How does the formula work?
Start by listing long-term borrowings: term loans, debentures, bonds, and other borrowings repayable after one year. Then separate secured debt from unsecured debt. For secured debt, identify the collateral: mortgage for immovable property, hypothecation for movable assets kept by the borrower, and pledge where possession or control is given to the lender. Finally, calculate debt service by adding principal due and interest due for the period.
How should I read the answer?
Long-term debt can help a business build capacity without immediately diluting shareholders, but it also creates fixed commitments. A finance reader must ask what the debt funded, whether it is secured or unsecured, what asset is offered as security, when repayments fall due, and whether operating cash flow can service the obligation.
Compare secured loan structures
The word used for security tells the learner what asset is tied up and who controls it.
Formula Lab
Understand the Formula
Read the formula like a business sentence before calculating it.
Formula 1
Long-Term Debt = Term Loans + Debentures + Bonds + Other Long-Term Borrowings
Formula 2
Debt Service = Principal Repayment + Interest Payment
Why this formula exists
Long-term debt is borrowing used for more than one year. It helps a company fund assets or expansion today, but it creates future commitments for interest and principal repayment.
How it is derived
Start by listing long-term borrowings: term loans, debentures, bonds, and other borrowings repayable after one year. Then separate secured debt from unsecured debt. For secured debt, identify the collateral: mortgage for immovable property, hypothecation for movable assets kept by the borrower, and pledge where possession or control is given to the lender. Finally, calculate debt service by adding principal due and interest due for the period.
Simple example
A manufacturer has a Rs. 40 Cr term loan and Rs. 15 Cr non-convertible debentures, so long-term debt is Rs. 55 Cr. If the Rs. 40 Cr loan carries 10% interest and Rs. 5 Cr principal is due next year, debt service on that loan is Rs. 4 Cr interest + Rs. 5 Cr principal = Rs. 9 Cr.
Solved Case Study
Read the Numbers Like an Analyst
Work through one business case slowly: understand the situation, calculate the ratios, then interpret what the numbers are really saying.
Case context
A Pune auto-components manufacturer takes a Rs. 40 Crore term loan for new CNC machines. The loan is secured by hypothecation of the machines and a mortgage on factory land. It also issues Rs. 15 Crore of non-convertible debentures to long-term investors. Long-term debt is Rs. 55 Crore before considering any current instalment due within one year.
Case: Long-term borrowing structure
A company has a mortgage loan of Rs. 250L secured by factory land and building, a hypothecation loan of Rs. 120L secured by machinery, unsecured debentures of Rs. 80L, and Rs. 50L due within the next year.
Classify long-term and current portions
Debt repayable after one year is long-term. Instalments due within one year become current maturities.
The balance sheet must show timing clearly because near-term repayment affects liquidity.
Read the security
Mortgage, hypothecation, pledge, secured loans, unsecured loans, and debentures do not mean the same thing. Security protects the lender; cash flow still protects the borrower.
Interpretation
What This Means In Practice
Read the result as a business signal, not as a standalone number.
Security changes lender risk, not business economics
A secured loan may be easier or cheaper to raise because the lender has collateral. But the company still needs operating cash flow to pay interest and principal.
Mortgage, hypothecation, and pledge are not interchangeable
Mortgage normally applies to immovable property, hypothecation to movable assets retained by the borrower, and pledge to assets where possession or control shifts to the lender.
Debentures are loans raised from investors
A debenture holder is a lender. Convertible debentures may later become equity, while non-convertible debentures remain debt until serviced or repaid.
Purpose of debt is as important as amount
Debt used for productive assets can build capacity. Debt used to fund recurring losses may simply postpone stress and increase future repayment pressure.
Avoid These Traps
Common Mistakes
Only the traps that commonly affect this lesson are shown here.
Calling every borrowing current liability
Only dues payable within one year or the operating cycle are current. Long-term loans and debentures belong in long-term debt, except for the instalment due within the next year.
Assuming secured debt is harmless
Collateral protects the lender; it does not automatically protect the borrower. If cash flow weakens, the borrower can still face default and asset enforcement risk.
Confusing hypothecation with pledge
In hypothecation, the borrower usually keeps possession and uses the asset. In pledge, possession or control is transferred to the lender or a lender-controlled agent.
Ignoring conversion and dilution
Convertible debentures may reduce future repayment pressure, but conversion can dilute existing shareholders. Non-convertible debentures remain debt obligations.
Key Takeaway
Long-term debt is not judged only by its amount. Read the purpose, security, repayment schedule, interest cost, covenants, and cash-flow capacity. Secured debt gives lenders a claim over assets; unsecured debt depends more heavily on the borrower’s credit strength.
Practice Checkpoint
Check Your Understanding
Work through the quiz in smaller sets. Your answers stay visible while this page is open, so you can review before moving on.
Question 1 of 16
Level 1Which description best captures long-term debt?
Question 2 of 16
Level 1Why does long-term debt need separate analysis from current liabilities?
Question 3 of 16
Level 1What is a secured loan?
Question 4 of 16
Level 1What is an unsecured loan?
Question 5 of 16
Level 1Which security is most closely associated with immovable property such as land or buildings?
11 questions remaining in this lesson.
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Balance Sheet - An Introduction
Balance Sheet Foundations
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Connected Concepts
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