I'm confused on the concept of net debt.

I've heard 2 ways:

short term debt+long term debt - cash and cash equivalents

and

total liabilities - cash and cash equivalents

is total liabilities = short term debt+long term debt?

### Net Debt Definition

Net debt looks at the total debt of the company and subtracts away the cash and marketable securities to get a realistic picture of the debt after paying off liabilities with cash on hand. This calculation is often used when calculating the enterprise value.

The calculation for enterprise value is:

Market Capitalization + Net Debt + minority interest + Preferred Shares

The enterprise value is important as it tells an investor how much it would cost to buy out the whole business - both debt and equity. However, an investor looking to purchase the whole business would not pay cash for cash - so you would theoretically pay off the debt with the cash that the company has.

### Net Debt Calculation

Net debt is calculated by taking the Total Debt - Cash and Cash Equivalents.

#### Total Debt Formula

Total debt consists of interest rate barring debt. This includes both short term and long term debt.

Short term debt consists of the current portion of long term debt as well as other interest rate carrying debt. Examples of short term debt include commercial paper and notes payable of a short term nature. Working capital items are not included (i.e. accounts payable, deferred revenue etc.)

Long term debt includes notes payable, revolvers (lines of credit), and capital leases.

Total Debt = Long Term Debt + Short Term Debt

#### What are Cash Equivalents?

Cash and cash equivalents consist of marketable securities and investments that could be liquidated to cash within a year's time frame. Cash is the cash that exists on the balance sheet.

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Net debt = Total debt - cash
Total debt = ST debt + LT debt
Total capital = Net debt + equity

Domino:

Net debt = Total debt - cash
Total debt = ST debt + LT debt
Total capital = Net debt + equity

How do I know from the liabilities, which is debt?

erwannabe:
Domino:

Net debt = Total debt - cash
Total debt = ST debt + LT debt
Total capital = Net debt + equity

How do I know from the liabilities, which is debt?

Look on the balance sheet. ST debt is usually comprised of (1) Loans and notes payable and (2) Current maturities of LT debt. LT debt usually has its own post right after total current liabilities.

Correct me if I'm wrong but you are only interested in Interest bearing debt. So any A/P or something like deferred revenues wouldn't be included in your total debt. Just short term and long term Loans/Bonds

There will be something in the company's 10k or 10q listing its debt. Scan though the Notes to Consolidated Financial Statements for a heading mentioning debt

Yes, only include Debt, not Total Liabilities. Items like Accounts Payable and other operating liabilities are not considered "financial capital" but rather "working capital."

These are the line items in the balance sheet liabilities. How do I know which is debt and what debt is short-term/long-term? This is all the info I was given..

LIABILITIES
CURRENT LIABILITIES (PAYABLE FROM UNRESTRICTED CURRENT ASSETS):
Accounts payable and accrued expenses
Customer and developer deposits
Current portion of long-term debt
Rebatable arbitrage earnings
Liability for compensated absences
Other liabilities

CURRENT LIABILITIES (PAYABLE FROM RESTRICTED CURRENT ASSETS):
Accounts payable and accrued expenses
Retainage payable
Current portion of long-term debt
Accrued interest payable
Liability for self insurance

NON-CURRENT LIABILITIES:
Revenue bonds payable, net
State loan obligations, net
Liability for self-insurance
Liability for compensated absences
Liability for post-employment benefits
Deferred revenues

Go through the 10k/10q and look at the foot notes. A/P ,customers and developer deposits, Retainage Payable and accrued interest payable wouldn't be considered debt since its all some variation of working capital. Current portion of LT-debt, Revenue bonds and state loans will all be debt. But things like other liabilities and Rebatable arbitrage earnings you would have to check the notes to see if it is interest bearing.

as always someone with more experience please correct me if I'm wrong

Net Debt=(any debt item) - (any cash or liquid investment item)

The only way to know for sure what's what is to read the notes in the 10k/q. Generally cash & cash equivalents is pretty self-explanatory. Look up the note on the 'short term investment' or 'financial asset' account to see if there are highly liquid holdings listed in there that are as good as cash, but the CPAs won't let them call it a cash equivalent. These get subtracted from the debt total.

Debt is simply any interest-bearing (or implied interest-bearing) liability. Depending on the client and/or your boss, non-operating (financial) derivatives--ie interest-rate swaps as opposed to say currency or commodity hedges--may also get counted. Occasionally, pensions are considered a debt-like liability. Long-term capital leases usually are as well.

I can't tell based on your example--which at first glance looks kinda FIGish, so I don't know shit--exactly what is and isn't debt, but here goes:
Current: Current Portion of Long-Term Debt x 2
Non-Current: Revenue Bonds, State Loan Obligations

Be sure to check any account with "other" in it for debt-like liabilities like financial derivatives, this will be in the notes.

The balance sheet looks like a builder of some sort. Commercial and infrastructure construction maybe? I suppose you could check in the notes if you wanted to get really detailed, but I think you can make some pretty straightforward guesses from what you have here.

Of the Current Liabilities, I would include Current Portion of Long-Term Debt (both restricted and unrestricted) and Accrued Interest Payable. Accrued Interest Payable means that some of the loans PIK (meaning they are Paid-in-Kind, or accrue when the interest is not paid in cash) so this is definitely a debt item. Everything else in the current section appears to be related to the operations of the business rather than the capitalization of the business.

Of the Non-Current Liabilities, I would include Revenue Bonds Payable and State Loan Obligations. Again, everything else appears to be an operating liability, not a financial liability.

Net debt = Total debt - cash
Total debt = short term debt + long term debt

Short Term Debts: Debts that has maturity life less than 1 year
Long term debts: Debts that has maturity life more than 1 years
Total Debts: All debts owned by company both long term and short term.

1) Financial Asset -> remove from EV not ND
2) Loan repayment -> will decrease your cash balance within the year -> include in ND calculation
3) Preferred shares -> remove from EV not ND
4) Bond -> include in ND
5) Accrued interest expenses -> include in ND

EV = Equity + Net Debt

Or Equity + Gross Debt - Cash

In other words, it is not correct. You have an EV of 2,400,000, which comprises of an equity value of 650,000 and the net debt Portion -> 2,400,000 - 650,000 = 1,750,000. To calculate gross debt you have to add the cash to the net debt.

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Total Debt would be 1,770,000; they prob threw in the cash fig just to throw people off.

If I'm doing a debt deal, then usually I'll build in an option to show the company pro forma for the leverage we're pitching.

I've never been asked to use any debt number other than most recent 10-q or 10k debt.

Comparable companies valuations are of necessity short-sighted.

You have to use common sense in this. If the comp has had no significant change in capital structure, always use most recent data available (same as Mrs Ind mentioned). However, be careful if there have been significant changes. For example, if the comp raised \$1B last month in equity and paid off all debt, you cannot use debt from the most recent 10-q as the current share price and number reflects the change in capital structure. 90% of the time, this will not be the case, however. Making these adjustments is not hard to do for public comps as they always disclose material changes in capital structure. Just make sure you review filings post last 10-Q.

Not perfect solution as you would obviously would want to have today's net debt figure but trying to forecast this is going to be even less perfect than using latest filings.

For valuation, you use latest balance sheet and latest market price.

Yep. Alpine, you're right... but in the best of worlds, the comp you're using should already be pro-forma'ed by the analyst whose coverage universe it belongs to. At least, that's the way it's supposed to work in my group.

In reality, of course, a particular comp is thrown randomly into the comp summary sheet by your associate at 4 AM, at which point you find out that the comp in question was last updated by an analyst in Kazakhstan or Yemen in 2004 and that, on top of everything, all the numbers are inexplicably denominated in the Thai Bhat. Then you scramble around trying to simultaneously spread the comp from scratch and pro-forma it. You finish the comp at 5 AM, but your relief is extremely short-lived as, upon F9ing the comp summary sheet, you realize that even though you double-checked your numbers, the firm value number is coming up at just under a trillion USD. And as the sun begins to peek through the windows of your particular Manhattan skyscraper (yet again!), you curse for all eternity the name of the analyst in the next cube whose job it was to keep the damn thing updated in the first place.

Ahem. No. I'm not bitter at all.

I highly, HIGHLY recommend a peach martini. Immediately! Go get one :-)

Ma'am, yes ma'am! On the double.

Pretty funny

c'mon we must laugh lest we go insane, no?

Yes. Some days, black humor is the only kind I have left.

Uh yeah...that reminds me. I have 25 comps to do.

Ouch. I'm sorry, man. After working on mine on and off for days, I still have eleven. Grr.

Do you actually read through the footnotes when doing comps, or do you just pull out the figures you need?

How long does it take to do say 15 comps- lets say all US companies?

I have read the answers here and unfortunately I am still confused as well. As I understand it the purpose of calculating net debt is to determine the debt the company has outstanding less its cash because we are determining how much debt they have if they used all their cash to pay it off.

I understand that it is to determine interest bearing debt. I am assuming that the reason that you do not include liability accounts such as Accounts Payable is that they are part of the operations of the company and you assume that they since they are essentially rolling with operating activity. New accounts are added as items are purchased and then paid off when sales are received from the items created in a 30 to 90 or whatever day cycle. So not including AP, Accruals and other items makes sense to me.

Where I get confused is other non operating long term liabilities such as say pension obligations. Technically they are not interest bearing notes and they must be paid for over time as part of total cost of labor but on the other hand they are still obligations that will have to be paid down the road and I think a banker would consider these costs if they were thinking of loaning the company money so maybe this cost should be included in net debt. I am not however 100% sure I understand it completely so maybe someone else can illuminate.

"Can I cite this source for my dissertation?"

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