Term
Net debt
Loans, borrowings and leases less cash in the bank. Banks compare it with EBITDA, showing how many years the company would need to repay its debt from operations.
Updated
What it means
Net debt shows how much a company would still owe if it used all its cash to repay its financial liabilities. It is the sum of bank loans, borrowings, bonds and lease liabilities, less cash in hand and in bank accounts.
Amounts owed to suppliers, employees or the state are not normally included, because they belong to day-to-day operations. The boundary is not fixed, though: in a company sale the parties define by contract what counts as debt, and unpaid taxes, provisions and shareholder loans are the usual points of dispute.
Negative net debt means the company holds more cash than it owes. The figure on its own says little; it gains meaning relative to performance, most often to EBITDA, showing how many years the company would need to repay its debt from operations.
How it works in practice
Banks use net debt to EBITDA as a covenant in loan agreements and the company must report it regularly. If it is breached the bank may raise the interest rate, demand more security or call in the loan, so for clients with bank financing we monitor it quarterly.
In the sale of a business or a stake, the purchase price is often set as enterprise value minus net debt. Every euro counted as debt reduces what the seller receives, so when preparing a deal we draw up a precise schedule of items and their balances at the reference date.
Net debt is one of the leverage measures used in financial analysis. In a discounted cash flow business valuation it is subtracted from enterprise value to arrive at the value of equity for the shareholders.
What to watch out for
Year-end cash can be high by coincidence, for example just after a large receipt or before payroll. Net debt at a single date can therefore mislead, and in transactions average or normalised cash is often used instead.
A common mistake is forgetting leases and liabilities that are debt-like without being loans, such as supplier payments deferred for a long time. The bank or buyer will find them in due diligence and net debt will turn out higher than the company claimed.
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