Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Net Debt

What it is:

Net debt is a company's total debt less cash on hand.

How it works (Example):

The formula for net debt is:

Net Debt = Short-Term Debt + Long-Term Debt - Cash and Cash Equivalents

For example, let's assume that Company XYZ has $10,000,000 in short-term debt, $4,000,000 in long-term debt, and $1,000,000 in cash and cash equivalents. According to the formula, Company XYZ's net debt is:

Net Debt = $10,000,000 + $4,000,000 - $1,000,000 = $13,000,000

Why it Matters:

Net debt is a measure of a company's ability to repay its debts if they were all due today. Thus, it helps analysts and investors get a better feel for whether a company is over- or underleveraged -- that is, whether a company can "afford" its debt. Companies with large amounts of debt but also large cash positions are generally in better positions to weather adverse changes in the economic landscape, like interest rate fluctuations, recessions, etc.

To learn more about evaluating companies' debt loads, click here to read, The One Key Financial Statistic You Must Know.

Related Terms View All
  • Qualified Domestic Relations Order (QDRO)
    For example, let's assume that Jane and John are getting divorced. John has a 401(k) with...
  • Named Perils Insurance Policy
    For example, let's say John Doe owns a houseboat. His homeowners insurance policy does...
  • Weak Shorts
    Short-term traders typically only enter a short position long enough to capture a quick...
  • Nanny Tax
    For example, let's say John and Jane Doe hire Sally Smith to take care of their two...
  • Form 1099-DIV
    Let's say that John Doe has an account at Mutual Fund XYZ. The funds pay dividends of $1,...