Net Debt to Assessed Valuation

What It Is:

Net debt to assessed valuation is a term used in the municipal bond world to compare the value of debt to the value of the issuer's assets purchased or assessed.

How It Works/Example:

The formula for net debt to assessed valuation is:

Net Debt to Assessed Valuation = (Short-Term Debt + Long-Term Debt - Cash and Cash Equivalents)/Total Property or Asset Taxable Value

For example, let's assume that County XYZ has $100 million in short-term debt, $400 million in long-term debt and $10 million in cash and cash equivalents. About $250 million of real property, public utilities, and personal property in the county is taxed by the county. According to the formula, County XYZ's net debt to assessed valuation is:

Net Debt to Assessed Valuation = ($100 million + $400 million - $10 million) / $250,000,000 = 1.56

Why It Matters:

The lower the net debt to assessed valuation, the less risky a government's bonds tend to be. A higher ratio may indicate a situation in which the sale of the underlying assets may not be sufficient to pay off the debt.