Net debt

Net debt asks what a company would still owe if it used every dollar of cash to pay down borrowings tomorrow. It is a fairer picture of leverage than gross debt, because a company holding $10bn of cash against $12bn of debt is in a very different position from one holding none.

It is frequently negative, which means the company holds more cash than debt. That is a net cash position and it is a real form of strength.

Total debt of $600m and cash and equivalents of $200m, against EBITDA of $260m.

1. 1600 - 200 = 400.
2. 2Scaled against EBITDA: 400 / 260 = 1.5.

Every example in this glossary describes the same imaginary company, so the figures join up as you move between metrics.

• On its own it means little. Scaled against EBITDA it becomes a leverage ratio, which is how it is normally read.
• Below roughly 2x EBITDA is comfortable for most businesses; above 4x leaves little room for a bad year. Stable, predictable businesses carry more safely than cyclical ones.
• Check when the debt matures. A large balance due next year is a different problem from the same balance due in a decade.

• Not all cash is available. Money held overseas or required for day-to-day operations cannot really be used to repay debt.
• Operating lease obligations are debt-like and sit outside this figure under the treatment most filers use.
• Pension deficits and other long-term obligations are excluded too.

Net debt to EBITDA is one of five metrics in the Financial health category of the scorecard. Leases are taken as reported and are not capitalised into this figure, which is stated on the methodology page.

The full methodology covers where the figures come from, how the statements are normalised, and what is deliberately left unadjusted.