Net debt shows how much debt a company has on its balance sheet compared to its liquid assets. Net debt is metric used to measure a company’s ability to pay its obligations by comparing its total debt with its liquid assets. In other words, net debt shows us the total debt of a company minus cash on hand (and other similar liquid assets). The Net debt number is a measurement of a company ability to pay off the debt immediately if it were called.
To calculate the net debt of a company we need first to figure out the total debt of the company and subtract from that the cash and cash equivalents.
Net Debt = (Short-Term Debt + Long-Term Debt) - Cash and Cash Equivalents
How much debt and how much cash a company has can be found on the balance sheet of the company financial statements .
Net debt is a measure of the ability of a company to repay its debts so it is important of investors or analysts because it shows if the company can handle its current obligations and if it has the ability to take on more debt in the future. The management of the company might use the metric to decide whether they can borrow more money in order to expend and grow the company. Analysts and investors would use more as a metric to predict the ability of the company to handle adverse economic conditions. Net debt as a metric is significant for most investors while deciding to buy or sell a company. A high net debt usually is taken as indication of a poor overall financial health of the company.
A net debt number can be positive or negative. A negative net debt means a company has little debt and more cash, while a company with a positive net debt means it has more debt on its balance sheet than liquid assets. Most companies have more debt than cash and therefore investors need compare the net debt of a company on a relative basis with other companies in the same industry.