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High liability balances might indicate that a company is not in a very secure position going forward; however, it depends on what kind of company it is. If it is a growth company, which is projected to grow earnings exponentially in the coming years, high liability balances might not be a bad sign. For example, Netflix had high liability balances for many of its early years, and many were skeptical of its growth potential, particularly because it failed to show much revenue. However, it continued to grow subscribers and put its competition out of business by killing off Blockbuster. On the contrary, it could indicate that lenders and investors are satisfied with the company’s business plan and thus do not see the liabilities as a problem. However, if the company is in the decline phase of its life cycle, high liability balances could mean that bankruptcy is imminent, especially if earnings are dwindling. Exxon is a company that is taking on more debt even as the world shifts to clean energy, which means its future revenues are likely to shrink, meaning it may not be able to pay back its debts. So long as working capital is sufficient, the company that is growing will not seem too risky to investors (Hama & Santosa, 2018).
The pros of a high liability balance are that the company obviously has faith from lenders and investors. It means the company has a vision for where it wants to be and people are willing to support that vision with their capital. If the company is growing, high liabilities may not be a problem at all. Amazon was this way for many years. Now it dominates retail. The cons of a high liability balance are that the company may never reach its goals. Tesla is a company with a great deal of debt, and yet it is not making money from selling cars, but instead from selling carbon credits. This could be a problem down the road.
References
Hama, A., & Santosa, H. P. (2018). Effect Of Working Capital, Company Size, And Company Growth On Profitability And Company Value. PEOPLE: International Journal of Social Sciences, 4(2).
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