Any company must have liability for financing their company. Some company lend money for short term or long term. The higher liability, the worst company. As an investor you should analyze the debt so you could minimize your loss.

An auditor usually analyze the liabilities. They check the company liabilities detail. If they find the faultiness, they will inform to finance manager. And then the company must change the liability record.

You should notice features in analyzing liabilities like:

• Term of indebtedness (e.g., maturity, interest rate, payment pattern, amount)
• Restrictions on deploying and pursuing business activities
• Ability and flexibility in pursuing further finance
• Obligations for working capital, debt to equity, and other financial figures
• Dilutive conversion features that liabilities are subject to
• Prohibitions on disbursements such as dividends

(Wild, Subramanyam and Halsey, 2002. p 126)

Use these steps to analyze the liabilities of company:

1. Check their audited financial statement report and balance sheet note.

2. Check their double-entry accounting for Check their document agrreement, contract, notes, etc. Make sure they record the debt base and the document is match

3. Check the ratio debt of company. The company which has more than 30% debt is a risky company.Analyze the term of debt by comparing short term debt with quick asset. You should analyze the conditions and encumbrances.

4. Analyze the ability of company to settle debt. Do not invest to any companies which does not able to pay debt.

5. Compare the debt ratio with other company in some industry. For example, you may compare United Airlines with Pan American Airlines.

Some company succes to fraud the investor by hiding some debt in their financial statement. The company is also wrong to classify or describe their liability. You should be careful with this kind company.