Net Debt Calculator

What you owe, minus what you could pay it with

A company owing five hundred thousand while holding four hundred thousand in the bank is in a very different position from one owing five hundred thousand with nothing.

Total debt does not distinguish between them. Net debt does.

It adds up the borrowings, subtracts the cash, and gives you what would still be owed if the company used every available pound, dollar or rupee to pay lenders down tomorrow.

Three inputs, one subtraction. What makes it worth explaining is that both halves of the calculation are less settled than they look, and that the answer feeds directly into how a whole company gets priced.

Three boxes

1. Cash and cash equivalents. From the balance sheet, usually the first line under current assets.
2. Short-term debt. Borrowings due within a year, including the portion of long-term loans falling due in the next twelve months.
3. Long-term debt. Borrowings due beyond a year.

Net debt = short-term debt + long-term debt - cash and equivalents

Press Calculate and you get the figure. It can come back negative, and that means something specific, covered below.

Take all three from the same balance sheet date. Cash in particular moves a great deal between reporting dates, and a company that times a large receipt just before its year end will show a flattering position that does not describe most of the year.

What counts as debt, and what does not

This is where two people calculating net debt for the same company reach different answers, so it is worth being deliberate.

Clearly debt. Bank loans and overdrafts, bonds and debentures, term loans, the current portion of long-term borrowings, and finance or capital lease obligations. Anything where the company borrowed money and owes it back with interest.

Clearly not debt. Accounts payable, meaning what you owe suppliers. Accrued expenses. Deferred revenue, which is an obligation to deliver rather than to repay. Tax provisions. These are operating liabilities, and they arise from trading rather than from financing.

The distinction matters because a business with heavy supplier credit can carry large liabilities and no debt at all, and putting payables into this calculation would make it look leveraged when it is not.

Arguable. Operating lease liabilities, which now appear on the balance sheet under current accounting standards and which many analysts treat as debt-like. Pension deficits. Preference shares with mandatory redemption. Contingent consideration on acquisitions. Reasonable people differ, and what matters is being consistent and saying which treatment you used.

On the other side, cash equivalents conventionally means cash plus short-term investments that are readily convertible with insignificant risk of value change, typically maturing within three months. Some analysts also deduct longer-dated marketable securities. Again, defensible either way, and it should be stated.

One practical caution. Cash sitting in a subsidiary that cannot be moved without tax consequences, or a regulated entity required to hold minimum balances, is on the balance sheet and not truly available to repay group debt. Large multinationals often carry a meaningful amount of cash in this category.

Four balance sheets

The manufacturer owes half a million and holds enough cash to clear about a quarter of it. Ordinary, and the kind of position most trading businesses occupy.

The utility carries two million of borrowings against very little cash. Also ordinary, for a utility. Businesses with steady, regulated, highly predictable cash flows can support far more debt than businesses without, and their balance sheets reflect it. Comparing this figure against the software company's tells you about the two industries rather than about the two managements.

Which is the standing caution on this number. Net debt in isolation says almost nothing. Two million is alarming for a consultancy and unremarkable for a water company. The section on leverage ratios below is about turning it into something comparable.

When the answer is negative

A negative net debt means the company holds more cash than it owes. The usual term is a net cash position, and the software company above is in one to the tune of 240,000.

Watch how it moves with cash alone, on a fixed 500,000 of borrowings:

A net cash position is generally a sign of financial strength, and it is worth understanding that it is not automatically a sign of good management.

Cash earns very little. A company sitting on a large pile has decided, deliberately or by default, not to invest it in the business, not to return it to shareholders, and not to pay down what it owes. Sometimes that is prudence ahead of a downturn or an acquisition. Sometimes it is a board with no better ideas.

The useful follow-up question is not whether the number is negative but why. A young company holding the proceeds of a fundraising, a mature company hoarding, and a business deliberately keeping powder dry are three different stories behind the same figure.

The bridge to what a company costs

The main reason anyone calculates net debt is to get from a share price to what a whole company is worth.

Enterprise value = market capitalisation + net debt

Market capitalisation prices the equity, which is what shareholders own. But buying every share does not free you of what the company owes. You inherit the debt, and you also acquire the cash, which you can immediately use to pay some of it back. Net debt captures both in one figure.

Two companies, both with a market capitalisation of one billion:

Identical share prices, identical market caps, and enterprise values 1,050,000,000 apart. Buying the whole of A costs you seven hundred million net, because three hundred million of your purchase price comes straight back in cash. Buying B costs one and three quarter billion, because you take on the borrowings.

This is why acquisition prices and valuation multiples are usually quoted on enterprise value rather than market cap. It is also why comparing two companies on a price to earnings ratio can mislead when their balance sheets differ sharply. The market capitalization calculator gives you the other half of this equation.

Turning it into a leverage measure

Net debt on its own is a size. To judge whether it is a lot, put it against the company's ability to service it.

The standard comparison is net debt to EBITDA, which is net debt divided by earnings before interest, tax, depreciation and amortisation. It answers roughly how many years of operating earnings it would take to repay what is owed.

The manufacturer above, with net debt of 380,000 and EBITDA of, say, 150,000, is at about 2.5 times. As very rough orientation, below two is usually considered conservative, two to three is common and comfortable, three to four starts drawing attention, and above four is where lenders become interested in your covenants. Utilities and infrastructure businesses routinely run higher because their earnings are predictable enough to support it.

Two other ways to look at it.

Against equity. Net debt divided by shareholders' equity, which shows how the balance sheet is funded between lenders and owners.

Against interest cover. Operating profit divided by interest expense, which asks whether the earnings comfortably cover what the debt costs each year. Below about two and a bad year becomes a serious problem.

All three are more informative than net debt alone, and none of them means much without knowing the industry. A number that would worry you in a consultancy is unremarkable in a toll road.

This is a measurement of figures you supply rather than an assessment of a company, and nothing here is financial advice.

Questions people ask

How is net debt calculated?

Short-term debt plus long-term debt, minus cash and cash equivalents. A company with 500,000 of borrowings and 120,000 of cash has net debt of 380,000.

Do accounts payable count as debt?

No. Payables, accrued expenses and deferred revenue are operating liabilities arising from trading rather than borrowing. Only interest-bearing obligations belong here, along with finance lease liabilities.

What about operating leases?

Arguable. They now sit on the balance sheet under current standards and many analysts treat them as debt-like. Whichever you choose, be consistent and state which treatment you used.

What does a negative net debt mean?

The company holds more cash than it owes, which is called a net cash position. Generally a sign of financial strength, though a very large one can also mean the board has not decided what to do with the money.

How does this relate to enterprise value?

Enterprise value is market capitalisation plus net debt. Two companies with identical market caps can have enterprise values a billion apart if one is heavily borrowed and the other holds cash.

What is a healthy level of net debt?

It depends entirely on how predictable the earnings are. Compare it against EBITDA rather than judging the absolute figure, and expect utilities and infrastructure to carry far more than consultancies.

Should I include all cash?

Cash and short-term equivalents readily convertible with insignificant risk, usually maturing within three months. Be aware that cash trapped in subsidiaries or held to meet regulatory minimums is not genuinely available to repay group debt.

Why does the figure change so much between reports?

Cash moves far more than borrowings do. A large receipt timed just before a year end flatters the position, so a single date can be unrepresentative of the year as a whole.

References

The classification of balance sheet items, including the separation of short-term and long-term borrowings and the presentation of cash and cash equivalents, is prescribed for the balance sheets of registrants by Regulation S-X, which also governs the income statement line items from which earnings measures are drawn. The treatment of net debt as total interest-bearing borrowings less cash and equivalents, and of enterprise value as market capitalisation plus net debt, follows standard corporate finance practice as set out by the Corporate Finance Institute. The distinction between operating liabilities arising from trading and financing obligations follows the same source and Internal Revenue Service small business guidance on business liabilities.

1. United States Securities and Exchange Commission, Regulation S-X (17 CFR 210), including Rule 5-02 for balance sheet captions and Rule 5-03 for income statement line items. Text quoted in SEC staff correspondence at https://www.sec.gov/Archives/edgar/data/0001019361/000101936112000010/filename1.txt
2. Corporate Finance Institute, Accounting and Corporate Finance Resources. https://corporatefinanceinstitute.com/resources/accounting/markup/
3. Internal Revenue Service, Publication 334: Tax Guide for Small Business. https://www.irs.gov/publications/p334