Examples include accounts payable (money owed to suppliers), short-term bank loans, wages payable, and accrued expenses. The ratio of a company’s current assets to current liabilities is often used to assess a company's ability to meet its short-term obligations.
Why short-term debt matters to investors
Short-term debt matters to investors in stocks because it can indicate a company's financial health and ability to meet its obligations. A company with a high proportion of short-term debt may face difficulties if it cannot quickly renew or repay that debt, potentially leading to a cash crunch or even default. This can affect the company's stock price and investor confidence.
The debt-to-equity (D/E) ratio compares a company's total debt to its shareholder equity. A high D/E ratio, especially if it includes a significant amount of short-term debt, can be a red flag for investors. A company with a high D/E ratio may be more vulnerable to economic downturns or other challenges, potentially impacting its stock price.
Investors may discount the stock price of a company with a high reliance on short-term debt, reflecting the added risk and uncertainty. Short-term debt can also affect a company's cost of capital, which is used in stock valuation models. Higher interest rates on short-term debt can increase the company's cost of capital, potentially lowering its stock valuation.
