Liabilities: Concept, Types, and Their Impact on the Saudi Financial Market

According to International Financial Reporting Standards (IFRS), liabilities are a company’s present obligations arising from past events or transactions, which are expected to result in future cash outflows or transfers of economic resources. In other words, liabilities represent commitments by the company to pay money or provide goods or services to external parties such as banks, suppliers, or government entities.

In the Saudi context, this definition is strictly applied to both listed and unlisted companies, with liabilities forming a core part of the balance sheet equation alongside assets and equity. Liabilities appear on the balance sheet as evidence of a company’s external financing sources, and are used to assess capital structure and measure financial risk. Understanding liabilities helps investors and analysts gauge the extent of a company’s reliance on debt and its ability to meet obligations in a dynamic and competitive economic environment.

Liabilities in financial statements are divided into two main categories:

1. Current Liabilities (Short-term): Obligations that must be settled within one fiscal year. These include short-term debts, accounts payable, outstanding checks, accrued taxes, and unpaid salaries. They reflect the company’s day-to-day operations and its ability to manage working capital.

2. Non-Current Liabilities (Long-term): Obligations due after more than one year. These include long-term bank loans, bonds, long-term lease obligations, and deferred debt installments. This type is vital for financing capital projects and major expansions.

This classification is essential for analyzing a company’s liquidity and operational sustainability, as it shows the company’s ability to balance current and future obligations.

Liabilities are a fundamental component of the basic balance sheet equation:

Assets = Liabilities + Equity

Any increase in liabilities directly affects the company’s net assets and shareholders’ equity. For example, if a company increases its debt (liabilities) without a corresponding increase in assets, this reduces net equity. For this reason, investors and analysts monitor the debt-to-assets and debt-to-equity ratios as key indicators of financial risk and sustainability.

In the Saudi market, regulatory authorities require companies to fully disclose their liability structure, enabling transparency and comparison of debt reliance across companies and sectors.

Saudi companies resort to liabilities (debts and loans) for various reasons, such as financing capital expansions, covering operational needs, or seizing new investment opportunities. The motivation for liability-based financing varies by sector and company size.

In sectors like oil and petrochemicals, long-term debt is a core component for funding large-scale projects, while retail and service companies rely more on short-term liabilities such as accounts payable. Liabilities offer quick and flexible financing, but also impose obligations for interest and principal payments, which can impact company liquidity and profitability.

Management decisions regarding borrowing and adjusting liabilities reflect the company’s strategy in managing financial risk and balancing growth with debt levels.

The liability structure varies across economic sectors in the Saudi market:

- Banking sector: Deposits are the main liabilities, and banks rely on them to fund loans and operations.
- Oil and petrochemicals: High liabilities due to funding for major projects and long-term bonds.
- Industrial sector: Relies on a mix of bank loans and bonds to finance production lines and expansions.
- Telecommunications: Long-term liabilities to finance infrastructure (such as 5G networks).
- Services and retail: Relatively lower liabilities, mostly short-term, with greater reliance on operating cash flows.

This diversity highlights the importance of analyzing liabilities within the sector context, as high or low liabilities have different implications depending on the nature of the business.

Analysts use several financial ratios to measure the impact of liabilities on a company, most notably:

- Debt to Assets Ratio: Measures the extent of a company’s reliance on debt financing relative to total assets.
- Debt to Equity Ratio: Shows the size of debt compared to shareholders’ equity.
- Loans to Deposits Ratio (especially in banks): Indicates a bank’s ability to lend without exceeding safe limits.

High ratios indicate greater risk and higher interest burdens, while moderate or low ratios reflect financial flexibility and sustainability. In the Saudi market, these ratios typically range from 0.7 to 1 in most sectors and are higher in the banking sector.

Recent years have seen an increase in debt financing among Saudi companies, especially in capital-intensive sectors like oil and petrochemicals, driven by expansion into mega-projects. Conversely, sectors such as services and retail have maintained lower liability levels, benefiting from organic revenue growth.

Companies have taken advantage of a relatively low interest rate environment and strong banking sector liquidity, reducing the cost of liability financing. In 2024, Saudi public debt reached about 30% of GDP, a moderate level compared to other oil economies. Tadawul reports show that average debt-to-equity ratios among listed companies have remained stable.

On the regulatory front, authorities have issued updates to accounting disclosure and debt management standards, enhancing transparency in reporting financial risks.

Liabilities are clearly presented in the financial statements of listed companies:

- Saudi Aramco: Significant liabilities due to expansion and investment programs, split between current (accounts payable and short-term debt) and long-term (bonds and loans).
- Al Rajhi Bank: Customer deposits represent major liabilities (withdrawable obligations), increasing with depositor confidence and banking liquidity.
- Telecom companies (STC, Zain): Growing liabilities to finance infrastructure projects, appearing as long-term bonds and loans.
- Industrial companies (SABIC, Nadec): Government funding and long-term bank loans to support expansions.

These examples illustrate that liability structures differ according to company strategy and sector, directly impacting their ability to finance growth and absorb costs.

Working capital is calculated by subtracting current liabilities from current assets. If current liabilities increase without a corresponding rise in current assets, the company may face liquidity pressures and reduced ability to meet short-term obligations.

Effective working capital management depends on balancing the speed of receivables collection with the timing of current liability payments (such as extending supplier payment terms), giving the company flexibility in managing liquidity without resorting to additional financing. In the Saudi market, working capital management is a key indicator of financial management quality.

Monetary policies and interest rates directly affect the cost of liabilities for companies. When central banks raise interest rates, the cost of new and variable-rate loans increases, leading to higher debt servicing costs for companies.

In Saudi Arabia, the riyal is pegged to the US dollar, causing local interest rates to track global market changes. During 2024, stable interest rates and low inflation helped reduce interest burdens on companies, but this remains a factor to monitor, especially with any shifts in global monetary policies.

Liability levels influence company decisions regarding dividend distributions. When liabilities are high, companies allocate part of their cash flows to pay interest and installments, which may reduce the funds available for shareholder dividends.

Companies with high liabilities often adopt more conservative dividend policies until they demonstrate their ability to meet obligations. Conversely, companies with moderate or low liabilities enjoy greater flexibility to pay higher or more sustainable dividends. Thus, analyzing the liability structure is a key step in evaluating dividend policies of listed companies.

The years 2024-2025 have seen significant developments in accounting and regulatory standards related to liabilities in Saudi Arabia. The Saudi Organization for Certified Public Accountants has issued new guidelines for implementing IFRS, especially regarding disclosure of credit risks and liability classification.

Regulatory bodies have also organized workshops to clarify liability treatment methodologies, such as for pension funds and joint government debts. New regulations require companies to fully disclose their obligations and transparently calculate debt values, enhancing the credibility of financial statements and boosting investor confidence.

Macroeconomic factors such as oil prices, GDP, and inflation play a major role in shaping the liability structure of Saudi companies. For example, higher oil prices increase cash flows for oil companies, giving them greater capacity to manage liabilities, while global volatility leads to changes in interest rates and financing costs.

In 2024, the Saudi government continued issuing bonds and sukuk to finance infrastructure projects, resulting in higher long-term government liabilities, while liquidity remained strong due to export revenues. These factors affect all sectors and shape company strategies for borrowing and managing obligations.

Liability ratios have become an important part of sustainability and governance indicators in the Saudi market. High debt levels reflect the degree of risk in a company and impact its credit rating and the confidence of local and international investors.

Regulatory authorities encourage companies to maintain balanced liability ratios (often below 60% of assets) to enhance creditworthiness and company resilience during crises. Regular disclosures about liabilities are also a core part of corporate governance and transparency, strengthening the Saudi market’s appeal to foreign investors.