Net Debt: Definition, Calculation and Why It Matters for Valuation
Net Debt is total debt minus cash and cash equivalents. It shows the actual debt burden after accounting for liquid assets.
Net Debt Formula
Net Debt = Total Debt - Cash & Equivalents
What Counts as Debt?
- Bank loans
- Bonds payable
- Capital leases
- Shareholder loans
What Counts as Cash?
- Cash and bank balances
- Marketable securities
- Short-term investments
Net Debt to EBITDA
A key leverage metric:
Net Debt / EBITDA
| Ratio | Interpretation |
|---|---|
| < 2x | Healthy leverage |
| 2-3x | Acceptable |
| > 4x | High risk |
Example
| Bank Debt | $10,000,000 |
| Bonds | $5,000,000 |
| Total Debt | $15,000,000 |
| Cash | ($3,000,000) |
| Net Debt | $12,000,000 |
Why It Matters
- Shows true debt burden
- Used in EV calculation: EV = Equity Value + Net Debt
- Credit analysis metric
