Part 2 · Balance sheet: a company's inventory of assets · Lesson 8
Liabilities: debts come in different kinds
Not all liabilities are the same kind of debt. Separating interest-bearing debt from debt that arises from doing business reveals a company's real burden.
QToday's question
Is a company with a lot of debt always a risky company?
When you see 'KRW 4 billion in liabilities' in the news, it makes you uneasy somehow. But its meaning is completely different depending on whether that KRW 4 billion is money borrowed from a bank, unpaid flour bills, or cake deposits customers paid in advance. In this lesson, you'll learn to read liabilities by type.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
In Lesson 6 you learned the balance sheet's basic structure, assets = liabilities + equity, and in Lesson 7 the kinds of assets. This lesson looks at the other side of the scale: liabilities. Robin Bakery's one-page summary is in Lesson 1, and 'III. Financial Matters', where the balance sheet sits in a business report, was covered in Lesson 5. To recall what an interest rate is, see Learn (Economics) Lesson 12.
- STEP 1 · Basic conceptsA liability is an obligation to repay in the future
You can explain what a liability is and how current and non-current liabilities are split using a one-year cutoff.
- STEP 2 · Understanding how it worksDebt that pays interest, debt that comes from doing business
Distinguish from operating liabilities such as and , and say why liabilities can mean different things.
- STEP 3 · Real-world applicationCalculating the interest burden and reading liabilities in DART
You can calculate how much interest expense cuts into operating profit at different interest rates, and find the liability items and notes in a business report.
STEP 1A liability is an obligation to repay in the future
Hearing the word liability, you probably think of bank loans first. But in accounting, liability is a broader term. Let's pin down the definition precisely first.
A liability is 'other people's money' and a 'promise to repay'
On the balance sheet, a liability is an obligation to hand over money, goods, or services to someone else in the future because of a past transaction. It isn't only money borrowed from a bank. If you bought flour on credit and haven't paid yet, that unpaid bill is a liability, and if a customer paid for a cake in advance and you haven't made it yet, that deposit is a liability too. They have one thing in common: they are promises that end only when you hand something over.
Recall the scale picture from Lesson 6. Assets of KRW 10 billion were funded with someone's money; of that, KRW 4 billion of liabilities is other people's money that must be repaid and KRW 6 billion of equity is the shareholders' money. So more liabilities means the same assets are propped up by more of other people's money.
Split into two boxes by a one-year cutoff
Just as assets are split into current and non-current, liabilities are also split using one year as the cutoff. A liability that must be repaid within one year of the reporting date is a current liability, and one that may be repaid after that is a non-current liability. Laying out Robin Bakery's (fictional) liabilities by this rule gives the following.
| Item | Item | Amount |
|---|---|---|
| Current liabilities KRW 2 billion | Trade payables (flour and butter bought on credit) | KRW 800 million |
| Short-term borrowings (bank loans due within a year) | KRW 600 million | |
| Advances received (cake deposits) | KRW 300 million | |
| Other current liabilities (accrued payables, deposits received, etc.) | KRW 300 million | |
| Non-current liabilities KRW 2 billion | Long-term borrowings (store equipment loan) | KRW 1.5 billion |
| Other non-current liabilities (retirement benefits, etc.) | KRW 500 million | |
| Total liabilities | KRW 4 billion | |
Robin Bakery is a fictional company created for this course. The breakdown of the detailed items is also an educational assumption.
The reason we look at current liabilities separately is that they're 'money going out soon'. If KRW 2 billion must be repaid within a year and current assets convertible to cash within a year are KRW 3 billion, there's breathing room. This comparison is the current ratio you'll learn in Lesson 10 (30 ÷ 20 = 150%).
Quick checkIs money borrowed from a bank to be repaid in three years a current or a non-current liability? And what if six months remain until maturity?
STEP 2Debt that pays interest, debt that comes from doing business
Current vs. non-current tells you 'when' it's repaid. The more important question for an investor is 'what kind' of debt it is. Start by separating out the debt that carries interest.
Debt that pays interest: borrowings and bonds payable
is, literally, debt on which interest must be paid. Typical examples are from banks and (corporate bonds) that the company issues to borrow from investors. This debt accrues interest over time, and at maturity the principal must be repaid in a lump sum or borrowed again (refinanced). Refinancing in a period of rising rates makes the interest much more expensive. Robin Bakery's interest-bearing debt is KRW 2.1 billion, the sum of KRW 600 million of short-term borrowings and KRW 1.5 billion of long-term borrowings.
Debt from doing business: trade payables and advances received
are the price of raw materials bought on credit and not yet paid. A bakery usually pays the flour company about a month later, and in the meantime that money is recorded as a liability. It carries no interest, and as long as the business continues, it is a 'revolving' debt that arises again once repaid. In fact, being able to pay suppliers later can also mean the company has bargaining power.
are more interesting. If a customer pays for a Christmas cake in advance, the company has received the money but not yet handed over the cake, so a liability arises: the 'obligation to deliver the cake'. This liability is not paid off with money; it disappears when the cake is delivered, and at that moment it becomes sales. So a rise in advances received can be a signal that orders that will become sales are piling up. It is an especially important number in industries such as shipbuilding and construction that receive payment in advance.
Two more worth knowing: lease liabilities and provisions
A company that rents its stores calculates the future rent payments at present value and records them as a . Because of the accounting standard applied since 2019 (K-IFRS 1116), the liabilities of retail, restaurant, and airline companies with many stores look much larger. It is not borrowed money, but it is money that must be paid, so many analysts treat it as close to interest-bearing debt. A is a liability set aside in advance for money that is likely to go out even though the amount or timing is uncertain. Product warranty repair costs and damages likely to be lost in a lawsuit are examples.
See it in a picture: sort Robin Bakery's liabilities
Tap one item at the top, then tap the right basket below. When all six items are in, the totals per basket appear.
Robin Bakery's (fictional) KRW 4 billion of liabilities. On real balance sheets, item names differ a little from company to company.
Common misconceptions
- "Lots of debt is always dangerous?"
- No. A company with KRW 500 million of interest-bearing debt out of KRW 4 billion in liabilities and one with KRW 3.5 billion are completely different. Trade payables and advances received often grow together as business does well.
- "Advances received are debt, so it's a bad number?"
- Mostly the opposite. It means orders for which the money is already received and only the goods remain to be delivered are piling up, so in order-based industries it is seen as a number that previews future sales. But also remember that it is money that must be returned if delivery fails.
- "The best company has zero debt?"
- Not necessarily. If a business earns more than the interest on borrowed money, a moderate amount of debt raises the shareholders' return (ROE). The issue is not the amount but the ability to repay.
Quick checkA shipbuilder's advances received jumped over one year. What is the first interpretation that comes to mind?
STEP 3Calculating the interest burden and reading liabilities in DART
Once you've picked out the interest-bearing debt, it's time to measure in numbers how much it eats into profit. When interest rates change, the weight of the same debt changes too.
Interest expense comes out of operating profit
Think of the income statement staircase: a company pays interest expense out of the operating profit earned from its core business, then pays tax on the rest and keeps net income. Assuming Robin Bakery (fictional) pays an average of about 4.8% a year on its KRW 2.1 billion of interest-bearing debt, its one-year interest expense is about KRW 100 million. The 'non-operating items −KRW 100 million' in the Lesson 1 summary table is exactly this interest expense. It pays KRW 100 million of interest out of KRW 1.5 billion of operating profit, so it has room to cover the interest 15 times over. This multiple is called the interest coverage ratio, covered in detail in Lesson 10.
The problem is interest rates. In Learn (Economics) Lesson 12 you learned that when the rate on a KRW 100 million loan rises from 3% to 5%, annual interest grows from KRW 3 million to KRW 5 million. Companies are no different. A company with lots of floating-rate loans, or with loans about to mature that must be borrowed again, sees interest expense rise right away when rates rise. This is why, in Learn (Economics) Lesson 18, heavily indebted construction and REIT stocks were weak during rising-rate periods.
See it in a picture: how much does interest grow when rates rise?
Move the average interest rate. It shows the one-year interest expense on KRW 2.1 billion of interest-bearing debt next to operating profit. Press 'If a downturn hits too' to see operating profit cut in half.
This is a fictional company calculation. Interest expense is simplified as interest-bearing debt × average rate, and the verdict thresholds (below 1x, below 3x) are only commonly used reference lines, not rules.
Find it yourself in DART: liabilities sit right below assets
The order is the same in a real report. Let's reopen the consolidated balance sheet of the business report we opened in Lesson 3. The screen below is a large listed company's business report (filed 2025.03.11), shown only as an example of finding your way, not an investment recommendation.
1234- 1In the document contents, expand III. Financial Matters.
- 2Open 2-1. Consolidated balance sheet and assets come first; scroll down and you'll see liabilities → current liabilities → non-current liabilities → total liabilities, followed by equity below.
- 3Be sure to check the unit. This report is in KRW million, so '1,000,000' is KRW 1 trillion.
- 4The (Note ○○) next to an item is a note number. Follow the note number beside the borrowings and bonds lines and you'll find the interest rates, maturities, and collateral laid out in tables.
Source: FSS DART, business report III-2-1 consolidated balance sheet screen (captured 2026-10). Unit: KRW million.
On the liabilities side, first find and add up the lines with interest-bearing names, such as short-term borrowings, current portion of long-term debt, bonds, and long-term borrowings. Then check in the borrowings note whether the rate is fixed or floating and when maturities are bunched. If maturities cluster within one to two years and rates are rising, interest could rise sharply when the company borrows again. Obligations not yet fully booked, such as lawsuits and payment guarantees, are checked in the note you saw in Lesson 5 and in Chapter XI of the annual report.
How to use it in investing
| When you see numbers like this | Try reading them like this |
|---|---|
| Total liabilities rose sharply | First split it up: did interest-bearing debt rise, or trade payables and advances received? |
| Advances received rose sharply | Check with the Business Overview (order backlog) whether orders have piled up |
| Short-term borrowings and current portion of long-term debt surged | Money to be repaid or borrowed again within a year. Compare against cash and current assets |
| Rising rates + lots of floating-rate borrowings | Higher interest expense can reduce net income. Check the trend in the interest coverage ratio |
Not always. The normal debt structure differs by industry. For a bank that takes deposits and lends, liabilities are the business itself, and some industries carry large advances received. Compare among companies in the same industry, and across several years. This lesson does not recommend buying or selling any particular stock.
Quick checkWith KRW 2.1 billion of interest-bearing debt, if the average rate rises from 4.8% to 8%, roughly what does the one-year interest expense become?
✓What we learned today
- A liability is an obligation the company must settle in the future with money, goods, or services. Those to be settled within a year are current liabilities, and those after that are non-current liabilities.
- Liabilities are broadly read as debt that pays interest (short- and long-term borrowings, bonds payable) and debt that arises in the course of business (trade payables, advances received, and so on). The first thing an investor looks at is interest-bearing debt.
- Of Robin Bakery's (fictional) KRW 4 billion in liabilities, interest-bearing debt is KRW 2.1 billion (short-term borrowings KRW 600 million + long-term borrowings KRW 1.5 billion), and operating liabilities are KRW 1.1 billion (trade payables KRW 800 million + advances received KRW 300 million).
- Money received in advance, like advances received, is a liability, but it turns into revenue once the goods are delivered. A rise in advances received can in fact be a sign that orders are backed up.
- When interest rates rise, companies with more interest-bearing debt see interest expense grow and profit shrink. With liabilities, you need to look at the type and the interest burden together, not only the amount.
We've looked at one side of the scale (liabilities); now it's time for the other side, equity, which is the shareholders' share. In the next lesson, we find out what share capital and retained earnings are, and why 'capital impairment', where accumulated losses shrink equity, is a warning sign.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. Which of Robin Bakery's liabilities count as 'debt that pays interest'? Choose all that apply.
Borrowings are debt borrowed from a bank that pays interest. Trade payables (unpaid bills) and advances received (deposits) arise in the course of business and usually carry no interest.
Q2. What are liabilities that must be repaid within one year of the reporting date called?
Liabilities to be repaid within a year are current liabilities, and those to be repaid after that are non-current liabilities. Even a long-term loan is moved to current liabilities once its maturity falls within a year.
Q3. How does advance payment for a cake disappear from the books?
Advances received are an 'obligation to deliver goods', so it ends when goods or services, not money, are handed over. At that moment it's recognized as revenue. That's why a rise in advances received is sometimes read as a signal of future sales.
Q4. A company has KRW 2.1 billion of interest-bearing debt and KRW 1.5 billion of operating profit. If its average interest rate is 5%, roughly what is the interest coverage ratio?
Interest expense is KRW 2.1 billion × 5% = KRW 105 million, and operating profit of KRW 1.5 billion ÷ KRW 105 million ≈ 14x. It means the core business earns enough to pay the interest 14 times over.
Q5. In a period of rising interest rates, which kind of company should you watch especially closely?
With floating-rate loans, interest grows right away when rates rise, and debt that is nearing maturity must be borrowed again at a higher rate. You can check the rate terms and maturities of interest-bearing debt in the borrowings note.
NextTerms · Next lesson · Related tools
A table showing what a company owns on a particular day (usually the end of the fiscal year) and the sources of the money that paid for those assets, liabilities and equity. Assets = liabilities + equity always holds.
Interest-bearing debtInterest-bearing debtLiabilities that must pay interest. They include short- and long-term borrowings, bonds payable (corporate bonds), and the current portion of long-term debt, and interest expense grows when rates rise.
BorrowingsBorrowingsMoney borrowed from financial institutions such as banks. What is due within one year is recorded as short-term borrowings (current liabilities), and what is due later as long-term borrowings (non-current liabilities).
Bonds payableBonds payableMoney a company has borrowed from investors by issuing bonds (corporate bonds). It pays set interest and repays the principal at maturity.
Trade payablesTrade payablesThe amount owed for raw materials or goods bought on credit and not yet paid. It is normally an operating liability that carries no interest.
Advances receivedAdvances receivedMoney received in advance before delivering goods or services. It is recorded as a liability because it is an obligation to deliver, and turns into revenue when delivered. In order-based industries, it is read as a signal of future sales.
Lease liabilityLease liabilityA liability recorded for future lease payments on stores, equipment and the like that the company rents, calculated at present value. Since K-IFRS No. 1116 (effective 2019), most leases are recorded on the balance sheet.
ProvisionProvisionA liability recorded in advance by estimating an obligation that is likely to be paid, even though the amount or timing is uncertain. Product warranties and lawsuit damages are examples.
NotesNotes to the financial statementsThe instruction manual for the financial statement numbers. It describes accounting methods, collateral and payment guarantees, contingent liabilities such as lawsuits, related-party transactions and more.
Interest rateInterest rateThe price of borrowing money. When rates rise, the present value of future earnings falls, which tends to lower stock multiples.
Lending rateLending rateThe rate of interest paid when borrowing money from a bank. It is set by adding a credit spread, reflecting the borrower's risk, to a benchmark rate.
Operating profitOperating profitProfit from the core business: revenue minus cost of sales and selling, general and administrative expenses.
Contingent liabilityContingent liabilityAn obligation, such as a lawsuit or payment guarantee, that is not yet confirmed but could require payment in the future. Check it in Chapter XI of the annual report and in the notes.
Put what you learned to use right away
Learn (Economics) · An interest rate is the price of borrowing money→Learn (Economics) · Interest rates and sectors→This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.