What is Net Debt? | The Motley Fool

Companies often have debt on their balance sheets, but the amount of debt only tells part of the story. If a company has, say, $20 million in debt but also has $25 million in cash, it may be in a much better financial position than a company with only $5 million in debt but no cash.

For this reason, it’s often more useful to look at a measure known as net debt, which equals the company’s debt. if all of her cash and cash equivalents were used to pay off her debt – or her ability to pay off her debts if she wanted to. In other words, net debt is simply the company’s total debt minus its cash and cash equivalents.

It is also important to note that a negative net debt implies that the company has more cash on hand than it should, which is often considered a sign of financial strength and stability. On the other hand, just because a company has a seemingly high level of net debt does not mean that it is financially unstable. Net debt is only one piece of the puzzle when assessing a company’s financial condition.

An example
To illustrate how net debt can be calculated, let’s see if we can calculate Intelit’s (NASDAQ: INTC) net debt on its balance sheet.

According to Intel’s latest balance sheet, the company has $2.6 billion in current and short-term debt, and an additional $20.0 billion in long-term debt, for a total debt of $22.6 billion. of dollars. However, the company also has $15.3 billion in cash and cash equivalents. Therefore, Intel’s net debt is:

So while Intel still has a positive amount of net debt, the total debt of $22.6 billion on its balance sheet gives the impression that the company is more indebted than it actually is.

The bottom line
Keep in mind that debt is just one thing to consider when evaluating a business. And remember that businesses go into debt for a variety of reasons. Even so, net debt can help you get a clearer picture of a company’s financial stability, so be sure to use it when evaluating potential investments.

This article is part of The Motley Fool’s Knowledge Hub, which was created based on the wisdom gathered from a fantastic community of investors. We’d love to hear your questions, thoughts, and opinions about the Knowledge Center in general or this page in particular. Your contribution will help us help the world invest better! Email us at knowledgecenter@fool.com. Thank you – and have fun!

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

Ann J. Cox