Net Debt
Key Highlights
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Net debt is a cash flow indicator that shows how much debt a company has and deducts cash and cash equivalent from it.
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Net Debt = Total Debt − Cash and Cash Equivalents
What is Net Debt?
Net debt is a cash flow indicator that shows how much debt a company has and deducts cash and cash equivalent from it. It provides a better idea of the amount to which a company actually owes, and therefore it allows you to estimate its health better. If you owe ₹1 lakh but you have ₹30,000 trapped in your savings account—your net debt would be ₹70,000.
How it is Calculated?
Net debt is determined as follows:
Net Debt = Total Debt − Cash and Cash Equivalents
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Total Debt: Short-term debt (e.g., one-year working capital loan) and long-term debt (e.g., term loan or bond).
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Cash and Cash Equivalents: Cash, bank deposits, and liquid instruments like marketable securities or fixed deposits that can be quickly converted into cash.
For instance, if a company has ₹50 crore of debt and ₹15 crore of cash and equivalents, then its net debt would be ₹35 crore.
Why It Matters?
Net debt is a better indicator of a firm's debt burden than total debt. A firm with a lot of debt but plenty of cash in the bank may be in better shape than another firm with less debt but no cash. In India, where firms borrow or banks lend in bonds, net debt is employed by investors, lenders, and analysts to:
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Calculate the firm's ability to repay its loans.
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Compare the company's financial health, especially if it belongs to a manufacturing or telecom industry.
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Assess investment risk or lending risk.
Examples
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Retail Chain: There is a retail company in Mumbai with loans worth ₹100 crore and also with cash and fixed deposits worth ₹40 crore. Its net debt is ₹60 crore, indicating moderate debt burden.
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Tech Startup: A Bengaluru company with ₹20 crore of debt and ₹30 crore of cash following a round of funding will have a net debt of -₹10 crore, presenting the picture of a cash surplus.
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Steel Maker: A Jharkhand company with ₹500 crore of debt and just ₹50 crore of cash will have a net debt of ₹450 crore, presenting the picture of greater financial risk.
Key Insights
1. Positive Net Debt: Cash less than debt. ₹200 crore net debt, for instance, is precarious if revenues are weak.
2. Negative Net Debt: Cash greater than debt, normally a desirable phenomenon. A -₹50 crore net debt is cash agility.
3. Industry Context: Net debt relevance differs across industries. India might have high-net debt for capital-intensive industries like power or infrastructure while IT companies will have low or net-negative debt.
