Learn About Other Liabilities on the Balance Sheet
Investing Lesson 3 - Analyzing a Balance Sheet
In the same way the handful of categories on the balance sheet classified under "other" serve as a sort of catch-all for items that don't neatly fall into one of the major lines, the section entitled "other liabilities" is a catch-all category in which companies can consolidate their miscellaneous debt and obligations. To discover what makes up the specifics of other liabilities on a given company's balance sheet, you need to check the footnotes buried deep within the Form 10-K filing or annual report.
If you're looking at something like a holding company, which is a form used by many corporations these days, especially those that are part of the S&P 500 or Dow Jones Industrial Average, the other liabilities section may contain things such as inter-company borrowings, which arise when one of the company's divisions or subsidiaries borrows money from another of the company's divisions or subsidiaries. Other liabilities may also include , sales taxes payable or other minutiae.
While the importance of this particular entry on a balance sheet will vary from firm to firm, most of the time, at most firms, the other liabilities section of the balance sheet shouldn't be of particular note. As long as nothing looks out of the ordinary, and you feel the notes adequately explain what the debt amounts represent and how they arise, that's usually sufficient to move on in your analysis. Most of these obligations are self-explanatory and not as important in the overall capital structure as the other major liabilities we have already discussed in this lesson.
You're really trying to find something that stands out; that raises red flags or that shouldn't be there.
To provide a real-world illustration, I pulled the annual report of Johnson & Johnson. The last full fiscal year was 2015. Flipping it open to page 31, the Consolidated Balance Sheet section shows "Other liabilities" of $10,241,000,000 for the year-ended. That made up only 16.4% of the $62,261,000,000 total liabilities owed by the company and only 7.7% of the total asset base of the firm. Johnson & Johnson is an enormous holding company with a complex history controlling 265 individual operating businesses.
It divides its business operations into three major categories:
- Consumer healthcare products, which consist of things like mouthwash, pain reliever, bandages, skin care products, disinfectant, heartburn tablets, face washes, eye drops, and contact lenses.
- Medical devices, which consists of things like heart stints to blood glucose monitoring systems to things that sterilize medical tools to reduce the chance of infection during surgery or other procedures.
- Pharmaceuticals, which include a world-class drug research and manufacturing operation that make medicine fighting everything from cancer and HIV to schizophrenia and diabetes.
The parent company, Johnson & Johnson itself, serves to move capital and support throughout the organization as each stand-alone individual subsidiary operates in an extraordinary, decentralized autonomous way, which is one of the strengths of the iconic enterprise.
The other liabilities section is relatively stable as a percentage of total liabilities and assets. It represents a small part of the balance sheet. It's not particularly interesting. It's not the sort of thing you'd spend a lot of time worrying about once you became familiar with the company, how it does business, how it is organizationally and legally structure, and the way it moves money between subsidiaries to lower the cost of capital or to speed up the development of some product or drug it wants to launch.