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.
Short-Term Debt Ratios
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.
Current Asset-to-Short-Term Debt Ratio
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.
- BusinessDictionary: "Current Asset"
- Finance Glossary: "Short-Term Debt"
- BusinessDictionary: "Current Assets to Short-Term Debt Ratio"
- Macrotrends. "Walmart Current Ratio 2006-2020." Accessed Aug. 19, 2020.
- Costco. "2017 Form 10-K," Page 41. Accessed Aug. 19, 2020.
- Walt Disney Company. "2017 Form 10-K," Page 60. Accessed Aug. 19, 2020.
- Apple. "2017 Form 10-K," Page 41. Accessed Aug. 19, 2020.
Nicholas B. Sisson holds a B.A. in economics from Ithaca College and a certificate in technical communication from J.B.S. Technical Communications, Ltd. Working in investment operations, Sisson participated in an initiative to revise and rewrite his group's procedure manual. More recently, Sisson created definitions of financial terms for the glossary of a major financial website. He has been writing since 2008.