Net Debt

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Definition of 'Net Debt'

Net debt is the difference between a company's total debt and its cash and cash equivalents. It is a measure of a company's financial leverage and its ability to repay its debts.

Net debt is calculated by subtracting a company's cash and cash equivalents from its total debt. Total debt includes all of a company's borrowings, such as loans, bonds, and leases. Cash and cash equivalents include cash on hand, deposits in banks, and short-term investments.

Net debt is a useful metric for investors because it provides a more accurate picture of a company's financial health than total debt. Total debt can be misleading because it includes cash and cash equivalents, which are not a liability. Net debt excludes cash and cash equivalents, so it provides a more accurate measure of a company's debt burden.

Net debt is also a useful metric for creditors because it provides an indication of a company's ability to repay its debts. A company with a high net debt ratio is more likely to default on its debts than a company with a low net debt ratio.

There are a few things to keep in mind when interpreting net debt. First, net debt is a static measure. It does not take into account a company's future cash flows or its ability to generate new debt. Second, net debt can be affected by accounting decisions, such as the way a company accounts for its pension liabilities. Third, net debt is not a perfect measure of a company's financial health. It is important to consider other factors, such as a company's cash flow, earnings, and assets, when evaluating its financial health.

Net debt is a valuable metric for investors and creditors, but it should be used in conjunction with other financial metrics to get a complete picture of a company's financial health.

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