Liabilities are debts or financial obligations that someone or some corporation is
responsible for paying within a defined parameter of time. Corporate liabilities in
particular are usually tied to increasing cash flow to build up assets to later be used to
sell and generate a profit. The goal in short is to sell enough of the assets to clear the
payment of liabilities and other associated costs and generate gross margin or profit.
Risk is involved in raising high liability and the associated obligations to repay those
liabilities. According to Young et al. (2019), it is wrong to assume that less debt is
preferable to more debt, and it is just as wrong to assume the opposite. When
examining the financial statements of a company for risk, it should be principally
examined for whether the company is overleveraged and what that may mean for that
company (Young et al. 2019). The main perspective from Young et al. (2019) is that
debt is just as valid and important in its use for the outcome of a company.
Many retailers point to the Friday after Thanksgiving, known as black Friday, as the
traditional target to get into the "black" for a financially sound position. In essence,
that is the first day that all the costs from the year, the liabilities will be covered due
to the sales and push that company into the profit zone for the year. In essence, it will
take the average retailer nearly 11 whole months to recoup the liabilities they
acquired throughout the year in costs, supplies, and capital assets to then flip the
profitability coin and begin to make money. That may seem like a long time, and
indeed it is, but competition breeds competitiveness and the sense to get in front of
the competition and acquire assets early or at times of low pricing to access margin
down the road. This target date isn't necessarily accurate any longer, but was a
benchmark date for a long period of time.
One such example of high liability linked high profitability would be Toyota. In the prior
year, Toyota had a long-term debt number of $217 billion dollars. This would seem to
be a huge and almost insurmountable number had it not been for their operating
revenue of $271 billion. That $271 billion was just revenue last year, and their debt is
long term and meant to be spread out. Toyota's gross margin (revenue minus
expenses) was $48.78 billion.
(2023, February 22). The World's Most Indebted Companies 2023. Global Finance
Young, S. D., Cohen, J., & Bens, D. A. (2019). Corporate financial reporting and
analysis: A global perspective (4th ed.). Wiley