A Cash Flow Approach to Analyzing Long-term Liabilities: A Pedagogical Exercise

Document Type



Published by the Financial Education Association in Journal of Financial Education, volume 41 issue 2, Summer 2015, p. 129-156.

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Financial Education Association

Publication Source

Journal of Financial Education


This paper presents a classroom exercise that helps students develop a mastery of analyzing long-term liabilities, including both on and off-balance sheet financing. This technique is best used as an extension to the traditional ratio-based financial analysis methods. While conceptually simple, this cash-flow based methodology provides a rich opportunity to introduce students to complex debt instruments, off-balance sheet financing, the complexities in some notes to financial statements and the relationships between valuation cash flows and debt service cash flows. The method is illustrated with a detailed example based on HCA Holdings, Inc.