I'm confused on the concept of net debt.
I've heard 2 ways:
short term debt+long term debt - cash and cash equivalents
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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