Net Debt
IntermediateNet debt is a company's total borrowings minus its cash and cash equivalents. It shows how much debt would remain if the company used all its cash to repay what it owes.
A company's total debt alone can be misleading. One with 900,000 of debt but 800,000 of cash is in a very different position from one with the same debt and no cash. Net debt adjusts for this.
For example, a company with loans and bonds totalling 900,000 and cash of 100,000 has net debt of 800,000. If its cash exceeded its debt, it would have negative net debt, often described as a net cash position.
What counts as debt can vary. Most definitions include bank loans, bonds and other borrowings; many now also include lease liabilities. Some exclude restricted cash, which the company cannot freely use.
Net debt is widely used in valuation. Enterprise value is often calculated as market capitalization plus net debt, and equity value as enterprise value minus net debt.
It is also used to judge leverage, especially through the ratio of net debt to EBITDA, which shows how many years of operating earnings it would take to repay net debt. Lenders and credit rating agencies watch these measures closely.
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