Everybody understands the concept of “debt.” It is what you owe to other people. Companies owe money to people and to other companies and to banks. However, companies also have cash and cash equivalents, like investments in liquid assets, such as bonds. Other people also owe that company money in terms of invoices that have not yet been paid, which is called “Accounts Receivable.” Net debt looks at what the company would owe if it grabbed all its cash and cash equivalents today and paid off some of its debts. Because there is a risk that AR might never be paid it is not included in the calculation.
- Skill level:
- Moderately Easy
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Things you need
Derive all the short-term debt of the company. This is everything the company owes that will have to be repaid before the year end. This includes unpaid bills, overdrafts, short-term loans and the proportion of any mortgages or long-term loans that have to be paid off before the end of the financial year.
Sum up all long-term debt. This is the portion of long-term loans and mortgages that will still be unpaid by the end of the current financial year.
Add up all cash in the business. This includes cash on hand, which is any physical cash you have in the safes on all your premises and all cash in tills in all your sales outlets. Add to this cash in the bank, which you can get by calling your bank. Finally, include the current value of liquid assets. Those are things that could be sold off today and converted to cash. This is generally taken to mean bonds and shares, but not inventory.
Add long-term debt to short-term debt to get a total debt figure. Deduct all the cash you summed up from this figure to arrive at net debt.
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