Net Debt Calculator

Created by Arturo Barrantes
Reviewed by Anna Szczepanek, PhD and Steven Wooding
Last updated: Apr 06, 2022

The outstanding net debt calculator indicates the remaining debt after using all the most liquid assets to pay it, giving an idea of the company's current level of indebtedness. In this article, we will cover what the net debt is, see the net debt formula, explore its calculation, and discuss a real-life net debt of a public company.

What is net debt?

The net debt is the result of subtracting all the most liquid assets of a company (cash and cash equivalents) from its total obligations (liabilities). Its value informs shareholders regarding the amount of money in the company accounts to pay other parties. In other words, it is the net amount of money that does not belong to the company.

For a deeper understanding, we will start with the total debt definition. Total debt includes all economic obligations the business/company has to other parties. It contains short-term debt and long-term debt.

Short-term liabilities are a form of debt that the company has to liquidate in less than a year. Accountants calls it: current liabilities. Some examples are:

  • Accounts payables;
  • Wage payables;
  • Utility payables;
  • Deferred revenues within 12 months of due time;
  • Short-term debt;
  • Current portion of long-term debt; and
  • Current portion of leases.

On the other hand, long-term liabilities are obligations that are due in a period longer than a year. Some examples are:

  • Bonds;
  • Long-term bank loans;
  • Deferred revenue;
  • Pension plans;
  • Leases, etc.

Generally, this debt bears interest.

Once we have total debt, we subtract its cash and cash equivalents (CCE). The latter is everything the company can convert into cash in less than 90 days. We consider certificates of deposit, treasury bills/notes, commercial papers, and money in market funds as cash equivalents.

The result helps analyze the funding structure of the company. See, for example, the debt to equity ratio, which warns us if the company is using much more credit than equity for its operations. Do not forget that the more debt, the more important the interest coverage; otherwise, the company might be on the verge of bankruptcy.

How do you calculate net debt?

As your pretty much imagined, the net debt formula is:

Net debt = Current liabilities + Long term liabilities - CCE,

where CCE = cash and cash equivalents.

You can find the first two items in the liabilities section and the third one in the assets section of a company's accounts. Here it is important to mention one variation to the net debt.

Some analysts and investors only consider the liabilities that charge interest. In such case, you would not consider accounts payable, wages payables, dividends payable, among others that do not bear interest. We prefer to call such debt financial debt. It would include:

Net financial debt = [(STD + CPLTD + CPL) + (Bonds + Leases + LTD)] - CCE,

where:

  • STD – Short term debt;
  • CPLTD – Current portion of long term debt;
  • CPL – Current portion of leases; and
  • LTD – Long term debt.

How to use our net debt calculator – Real life example

Our net debt calculator is quite easy to understand; in the first section, you have to fill in the values for short-term liabilities, long-term liabilities, and cash & cash equivalents. Let's explore Tesla Motors net debt:

Cash and cash equivalents = 16,065 MUSD (millions USD)

Current liabilities = 18,051 MUSD

Non-current liabilities = 11,289 MUSD

Net debt = 18,051 MUSD + 11,289 MUSD - 16,065 MUSD = 13,275 MUSD

Furthermore, we will calculate its financial debt. From its quarterly report page 21, we have:

Current portion of long term debt = 1,207 MUSD

Current part of leases = 509 MUSD

Non-current long term debt = 5,439 MUSD

Non-current part of leases = 999 MUSD

Then, we will have:
Current liabilities = 1,716 MUSD

Non-current liabilities = 6438 MUSD

Net financial debt = 1,716 MUSD + 6,438 MUSD - 16,065 MUSD = -7,911 MUSD

Tesla Motors has a negative net financial debt, which puts them in a strong position to acquire more interest-bearing debt to help sustain its growth.

How to analyze net debt

The best way to analyze the net debt calculator results is by building up a trend over the years and comparing it to other financial metrics like:

  1. Net debt compared to profits: The debt to income ratio relates how much profit the company is making compared to the debt it's taking on. Notice that debt can help the company grow, but managers have to use it efficiently.

  2. Debt service coverage: The debt service coverage ratio indicates how much of EBITDA the company can use to make the every-year interest and principal payments. We recommend a value of 2 at least.

  3. Debt to assets: The debt to asset ratio shows how much debt the company used for funding the acquisition of the assets. We recommend a value of no more than 80%.

  4. Cash flow to debt ratio: Free cash flow represents the money left for paying dividends, buying back stocks, other business acquisitions, and debt repayments. With this ratio, you will find out how the cash flow stands against the company's debt.

FAQ

What is a good net debt?

As a numerical value, the best net debt is the negative one. In that case, if the company decides to pay all its debt with its most liquid assets, it could do it. It shows an excellent financial position. Besides, if only the financial net debt is negative, it still indicates business strength against bankruptcy.

What is a good net debt to EBITDA ratio?

Experienced investors recommend a net debt to EBITDA ratio of less than three. It would show the current whole net debt could be payable in a maximum of three years approximately. However, suppose you notice EBITDA is growing quarter by quarter; therefore, you will likely see how the net debt to EBITDA ratio shrinks.

How do I calculate the net debt?

You can use Omni's net debt calculator or follow the steps:

  1. Get the short-term liabilities and add the long-term liabilities to them. You can find both in the balance sheet. That is the total debt.
  2. Subtract the cash and cash equivalents which you will find in the assets section of the balance sheet. The result is the net debt.

What is the difference: net debt vs total debt?

The main difference is that net debt is the remaining value (sometimes negative) after subtracting cash and cash equivalents. It refers to all the obligations the company would have to pay if they are due in less than 90 days. On the other hand, total debt groups all liabilities, indicating the company's overall obligations amount to other parties.

How do I calculate total debt?

To calculate total debt, you need to add short-term liabilities to long-term liabilities. You can find both items in the balance sheet of the company. Some analysts consider only interest-bearing liabilities as debt. In that case, you would not consider accounts payable, either wages or utilities payable. However, the exact name would be total financial debt.

What are the components of total debt?

Short term liabilities

Long term liabilities

Accounts payable

Bank loans

Current portion of long term debt

Long term debt

Current portion of leases

Leases

Wage & utilities payables

Deferred revenues

Deferred revenues

Bonds

Arturo Barrantes
Cash and cash equivalents
$
Short term debt
$
Long term debt
$
Net debt
$
Short term debt
Accounts payable
$
Current portion of the long term debt
$
Current part of leases
$
Other payables or accrued items
$
Long term debt
Non-current long term debt
$
Non-current part of leases
$
Other payables or accrued items
$
Cash and cash equivalents
Cash
$
Cash equivalents
$
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