Net Debt

What is Net Debt?

Net Debt is a metric used to measure the financial liquidity of the company and assist in determining if the company can pay off its obligations by comparing the liquid assets with the total debt, to put it in simple words it is the amount of debt the company has in comparison to the liquid assets and calculated as Debt minus cash and cash equivalents.

It helps us understand how a company is doing debt-wise. In other terms, it helps the investors have a closer look at where a company stands in terms of liabilities. Liabilities of a company shouldn’t exceed the cash inflows of the company. Otherwise, it would be impossible for a company to pay off its dues when the time is due.

Net Debt Formula

Here’s the formula –

Net Debt = (Short Term Debt + Long Term Debt) – Cash & cash Equivalents
Net Debt

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In the net debt formula above, we have three components.

  • The first component is the short-term debt. Short-term debts are called current debts. They can be due in less than a year. Current debts may include a short-term loan, a short-term payment of a long-term loan, etc.
  • The second component of the formula is long-term debt. The long-term debt is obviously due in the long run. But the companies need to make sure that the long-term debt is paid off when it is due (that may mean making periodic payments or paying at the end of the tenure).
  • The third and the last components are cash & cash equivalents. Cash & cash equivalents include cash on hand, a liquid investment with a maturity of three months or less, checking accounts, treasury bills, etc.

The idea is to see by removing the cash & cash equivalents from the picture (as it is already in ownership of the company), how much debt would still be left. It means that if all the cash & cash equivalents are used to pay off a portion of the total debt of the company, how much debt would still be left for the company to pay off.

Examples

You can download this Net Debt Excel Template here – Net Debt Excel Template

Go Technology has a great reputation in the market. Ramen, a new investor, knows that irrespective of a great reputation, it is important to check the financial health of the company. Here’s the information he found –

  • Short term debt of the company – $56,000
  • Long term debt of the company $644,000
  • Cash & Cash Equivalents – $200,000

Find out the debt position on behalf of Ramen.

Using the formula of net debt = (Short Term Debt + Long Term Debt) – Cash & Cash Equivalents

  • = ($56,000 + $644,000) – $200,000 = $500,000.

To know whether it is lower or higher, we need to look at other companies in the same industry.

Colgate Example

Below is the balance sheet of Colgate of 2016 and 2017.

Net Debt Formula

source: Colgate 10K Filings

Net Debt Formula = Short Term Debt + Long Term Debt – Cash and Cash Equivalents

Colgate’s Debt (2017)

  • Short-Term Debt of Colgate = 0
  • Long-Term Debt of Colgate = $6,566 million
  • Cash and Cash Equivalent = $1,535 million
  • Net debt (2017) = 0 + $6,566 – $1,535 = $5,031 million

Colgate’s Debt (2016)

  • Short-Term Debt of Colgate = 0
  • Long-Term Debt of Colgate = $6,520 million
  • Cash and Cash Equivalent = $1,315 million
  • Net debt (2017) = 0 + $6,520 – $1,315 = $5,205 million

Uses

For every investor, it is important to know whether a company is doing well financially or not. Thus, to check whether a company is in financial distress or not, they use the net debt formula. This formula helps them understand the true financial stance of a company.

  • A lower value is an indication that the company is doing quite well. A larger debt and a larger cash & cash equivalents will result in a lower net value. It means the company is in great shape financially to pay off its debt.
  • On the other hand, the higher net value is an indication that the company has not been doing pretty well financially.

Knowing this will help the investors in deciding whether they should invest in the stock of the company or not.

Net Debt  Calculator

You can use the following Net Debt Calculator.

Short Term Debt
Long Term Debt
Cash & Cash Equivalents
Net Debt Formula =
 

Net Debt Formula = (Short Term Debt + Long Term Debt) − Cash & Cash Equivalents
(0 + 0) − 0 = 0

Net Debt Formula in Excel (with excel template)

Let us now do the same example above in Excel.

This is very simple. You need to provide the three inputs of Short Term Debt, Long Term Debt, and Cash & Cash Equivalents.

You can easily calculate debt in the template provided.

Excel

Video on Net Debt Formula

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This has been a guide to Net Debt and its definition. Here we discuss how the formula to calculate net debt along with practical examples, its uses, and interpretation. Here we also provide you with Net Debt Calculator with a downloadable excel template.