'Net debt' is used quite often in finance and it is equal to financial liabilities of the company that are reduced by the cash amount (and cash equivalents) that are held by the company.
‘Net debt’ may be used for many reasons. Mostly it is used in valuations or some financial presentations of the company. In valuation this ratio has critical importance to the value of shares. If we know the value of a business (there are various methods to calculate this), then the value of shares is equal to the value of business less net debt. If company has no debt and has a lot of cash, value of shares will be higher than the value of the business (enterprise value). In case of valuation, all liabilities that do not belong to the working capital should be included in to net debt, and all financial assets or other assets (for example, unused land plot) that do not generate any income in to the cash flow (which is used for valuation) should be excluded.
If net debt is calculated by company’s accountants for some presentation or annual report, it normally includes current and non-current financial liabilities with accrued interest, liabilities from corporate transactions and excludes cash and cash equivalents, and other financial assets (securities held for trading, derivative financial assets and similar).
Investment psychology gains momentum in contemporary business world
Most Popular Articles
Investing in Gold (I)
Investing in Gold (II)
Investing in Uncertain Period
ARE YOU INTERESTED IN:
BROWSE ON DICTIONARY: