Short-Term Debt Ratio

Short-term debt describes liabilities that are due to be paid within one year. Using an accounting metric called a debt ratio, it is possible to gauge whether a company will be able to meet its short-term debt obligations. This ratio indicates this by making a comparison with a company's current assets.

Debt can be broadly defined as an amount of money owed by a borrower to a lender. Lenders loan money on the condition that it is repaid within a specific time frame and that it includes accrued interest at an agreed-upon rate. Debts which must be paid off within a time frame greater than one year are called long-term debts; those which must be paid off in one year or less are short-term debts.

A short-term debt ratio indicates the likelihood that a company will be able to deliver payments on its outstanding short-term liabilities. In this context, short-term debts include liabilities with a repayment time frame of less than one year from initial issue (such as commercial paper) rather than the sum of all debt payments (final and interim) due within a coming 12-month period.

A company's current assets are represented by cash outflows directed toward production for generated cash inflows from product sales. Examples of current assets include inventories, receivable accounts, existing liquidity (cash) and semi-finished products awaiting completion. A company's current asset figure is commonly analyzed in conjunction with its short-term debt.

The current asset-to-short-term debt ratio provides a measure of whether a company would be capable of making payments on its short-term debt using only the value of its current assets. This ratio is calculated by dividing a company's current assets by its current liabilities during a given accounting period, such as one quarter. Ratios greater than one reflect favorably on the company; ratios less than one suggest that the company may be insolvent.