TL;DR: Net debt equals total debt minus cash and cash equivalents. Illustrative example only: a company has short term debt of $200,000 and long term debt of $700,000, giving total debt of $900,000, and holds cash of $350,000. Its net debt is $550,000, since $900,000 minus $350,000 equals $550,000. Against illustrative EBITDA of $275,000, net debt is 2.0 times, since $550,000 divided by $275,000 equals 2.0. If cash exceeds debt, the company has net cash instead.
Key Takeaways
- The worked example in this draft is fully illustrative. Its arithmetic is recorded in Sources and method below and was recomputed for this draft.
- Definitions here follow standard filing usage. Where providers or filings use a different definition, the draft says so and tells you to check which one a source is using.
- This is educational information, not financial advice, and it is not a recommendation to buy, sell, or hold any security or fund.
Work the calculation and the leverage view
All figures in this section are illustrative. Total debt here means interest bearing borrowings: $200,000 plus $700,000 equals $900,000. Trade payables and other operating liabilities are not included in this standard definition, though some analysts use broader versions, which is why you should always note which definition a source is using. Subtract cash of $350,000 and net debt is $550,000. That is the repayment burden left if every dollar of cash went to lenders today.
The ratio to EBITDA puts the burden in years of operating earnings terms. EBITDA itself is defined in what is EBITDA. Here $550,000 divided by $275,000 equals 2.0, a shorthand for the scale of debt relative to earnings power. It is a shorthand, not a repayment schedule: EBITDA ignores tax, interest, capital spending, and working capital, so a company at 2.0 times is not literally debt free in two years. Definitions of debt on the balance sheet vary, so compare like with like.
Net debt, gross debt, and enterprise value
Gross debt alone overstates the burden for a cash rich company and understates nothing for a cash poor one. Net debt corrects for the cash offset, which is why it appears inside enterprise value: the buyer of a whole company takes on its debt and gains its cash. That bridge is set out in what is enterprise value. Net debt also complements the debt to equity ratio explained. One compares debt with the owners stake. The other nets debt against cash and compares it with earnings. Using both prevents a single ratio from carrying the whole leverage judgement.
A negative net debt figure, usually called net cash, is common in mature, cash generative businesses. It signals flexibility, though it can also invite the question of why surplus cash is sitting idle rather than invested or returned, which is a capital allocation question, not a safety concern.
What to check before trusting a net debt figure
Check what the source counts as debt. Leases, pension deficits, and preferred shares are included by some data providers and excluded by others, and the choice can move the figure materially. Check the date. Cash swings across a quarter end, especially in seasonal businesses, so a single snapshot can flatter or penalise. And check the cash itself. Cash held in a subsidiary or a jurisdiction where it cannot easily be used to repay group debt is worth less as an offset than unrestricted cash at the parent.
Used carefully, net debt is one of the fastest honest reads on financial risk. Used as a single headline with no definition attached, it can mislead in either direction.
For the earnings side of the same leverage question, see interest coverage ratio explained, which compares operating earnings with the interest bill itself. This article is educational information, not financial advice. Prices, company figures, and fund figures in the worked example are illustrative and are not figures for any real security, company, or fund.
Sources and method
- Target keyword: "net debt explained" from .saeo/keywords.yaml (queue entry added 2026-10-31). No search volume or difficulty figure is claimed; both are recorded as unknown in the queue entry.
- All figures are labelled illustrative examples. Arithmetic verified for this draft on 2026-10-31 by recomputation in Python: 200,000 plus 700,000 equals 900,000; 900,000 minus 350,000 equals 550,000; 550,000 divided by 275,000 equals 2.0.
- Internal links checked against existing drafts in this folder on 2026-10-31: what-is-ebitda, how-to-read-a-balance-sheet, what-is-enterprise-value, debt-to-equity-ratio-explained.
- Distinction check: Debt to equity and enterprise value exist. No explainer defined net debt itself or its definition traps.
