What is Net Debt to Assessed Valuation?
Net debt to assessed valuation is a term used in the municipal bond world to compare the value of debt to the value of the issuer's assets purchased or assessed.
How Does Net Debt to Assessed Valuation Work?
The formula for net debt to assessed valuation is:
Net Debt to Assessed Valuation = (Short-Term Debt + Long-Term Debt - Cash and Cash Equivalents)/Total Property or Asset Taxable Value
For example, let's assume that County XYZ has $100 million in short-term debt, $400 million in long-term debt and $10 million in cash and cash equivalents. About $250 million of real property, public utilities, and personal property in the county is taxed by the county. According to the formula, County XYZ's net debt to assessed valuation is:
Net Debt to Assessed Valuation = ($100 million + $400 million - $10 million) / $250,000,000 = 1.56
Why Does Net Debt to Assessed Valuation Matter?
The lower the net debt to assessed valuation, the less risky a government's bonds tend to be. A higher ratio may indicate a situation in which the sale of the underlying assets may not be sufficient to pay off the debt.