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Net Debt

Written By
Paul Tracy
Updated February 16, 2021

What is Net Debt?

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

How Does Net Debt Work?

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 Does Net Debt Matter?

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 how to evaluate companies using profitability, liquidity, and debt leverage ratios, click here to read 20 Key Financial Ratios Every Investor Should Use.]

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