# How Net Debt Is Calculated and Why It Matters to a Company

> **Definition**
>
> Net debt is the amount of total debt that exceeds the amount of total cash and cash equivalents.

## What Is Net Debt?

A company's net debt refers to its total debt obligations after subtracting its cash holdings and [liquid assets](https://www.investopedia.com/terms/l/liquidasset.asp). This financial indicator provides a more accurate assessment of a company's obligations since it accounts for available liquid assets that could be immediately used to reduce debt.  

Net debt is a key consideration during corporate acquisitions. In addition, during periods of economic decline, stakeholders focus on net debt levels to determine how well companies can withstand the financial difficulties ahead.

### Key Takeaways

*   Stakeholders use net debt to get a stronger sense of a firm's financial liabilities.
*   It's found by subtracting cash and cash equivalents from total debt.
*   Analyzing net debt shouldn't be done without a look at the industry the firm is in since capital-intensive sectors generally sustain higher debt levels than service-oriented businesses.
*   Net debt ratios such as net-debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) help inform stakeholders about a firm's debt burden and ability to repay its obligations.

![Net Debt](https://www.investopedia.com/thmb/H3Z4FtWXEdCytLq0AiSrD-OXjIU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TermDefinitions_NetDebt-7d5c7b84779e4264b263373ee642edb5.jpg)

*A lower net debt is a good indicator of a company's financial health. — Investopedia / Mira Norian*

## Understanding Net Debt

For many analysts, net [debt](https://www.investopedia.com/terms/d/debt.asp) shows the true picture of a company's financial obligations by looking at how much debt would remain if it used all its available cash to pay off what it owes. It's like looking at your ability to pay off your credit cards, college loans, and mortgage based on what you have in the bank and things you can sell quickly.

Unlike total debt, which adds up all money owed, net debt provides a more realistic view of a company's financial health by factoring in the cash resources it could immediately use to pay off those obligations.

The formula is straightforward:

> Net Debt = Short-term Debt + Long-term Debt - Cash and Cash Equivalents ([CCE](https://www.investopedia.com/terms/c/cashandcashequivalents.asp))

Breaking this down:

*   Short-term debt includes obligations due within 12 months, such as bank loans coming due, [accounts payable](https://www.investopedia.com/terms/a/accountspayable.asp), and upcoming lease payments.
*   Long-term debt covers obligations due beyond one year, like bonds, mortgages, and multiyear loans.
*   Cash and cash equivalents are money in the bank and investments that can be quickly converted to cash (usually within 90 days), such as certificates of deposit, Treasury bills, and commercial paper.

Some analysts might include [marketable securities](https://www.investopedia.com/ask/answers/033015/what-are-some-common-examples-marketable-securities.asp) like stocks and bonds that can be sold quickly alongside cash when calculating net debt. Others might leave out that and other forms of "restricted cash" from their calculations.

When examining net debt, context matters. A high net debt isn't always bad—it might indicate a company has invested heavily in growth opportunities. Similarly, a very low or negative net debt (more cash than debt) might seem healthy but could suggest the company isn't investing enough in its future.

> **Tip**
>
> Net debt per capita is a country-level metric that looks at a nation's total sovereign debt and divides it by population size. It's used to understand how much debt a country has in proportion to its population, allowing for between-country comparisons.

## Examples of Net Debt

Suppose we're interested in investing in Evergreen Industries, a hypothetical midsized industrial equipment maker with the following financial position:

*   Short-term debt: $45 million
*   Long-term debt: $230 million
*   CCE: $85 million
*   Net debt = $45 + $230 - $85 = $190 million

Now compare Evergreen with two hypothetical industry competitors:

**BlueRidge Industries**

*   Short-term debt: $30 million
*   Long-term debt: $315 million
*   CCE: $120 million
*   Net debt = $225 million

**Centerpoint Manufacturing**

*   Short-term debt: $60 million
*   Long-term debt: $190 million
*   CCE: $75 million
*   Net debt = $175 million

Despite having relatively similar business operations and revenue figures, these three companies have distinctly different debt profiles: Evergreen carries more debt than Centerpoint but less than BlueRidge. However, the net debt calculation reveals that BlueRidge maintains a substantially larger cash reserve relative to its total debt, compared to Evergreen.

If a recession were to occur, BlueRidge might face greater challenges servicing its higher debt load, yet its larger cash cushion provides some buffer against immediate financial distress. Meanwhile, Centerpoint maintains the lowest net debt position, potentially being more financially flexible but perhaps with fewer growth investments.

We might add more depth to our analysis if we consider how Evergreen recently invested heavily in modernizing its production facilities, which goes a long way toward explaining its elevated debt levels. These investments aim to improve operational efficiency and boost future profitability. Without this context, investors might misinterpret Evergreen's debt position as negative rather than strategic.

### Real-World Example: Amazon

![Amazon.com Inc.'s 2024 consolidated balance sheets.](https://www.investopedia.com/thmb/4D1ebMnr1IYHPv5W7PBnEF0EuUI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Liabilities-c9248389f72c4d08a8175e5341db5351.png)

*Amazon.com Inc.'s 2024 consolidated balance sheets from its form 10K, filed in February 2025, enables you to calculate its net debt.*

Based on Amazon.com Inc.'s ([AMZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=amzn)) 2024 balance sheet (see above), we can calculate its net debt position.

**2024:**

1.  Total debt = Long-term debt = $52.6 billion
2.  Cash and cash equivalents = $78.8 billion
3.  Marketable securities = $22.4 billion (these can be included as they're typically liquid)

Net debt = Total debt - Cash and cash equivalents - Marketable securities  
Net debt = $52.6 billion - $78.8 billion - $22.4 billion  
**Net debt = -$48.6 billion**

**2023 (for comparison):**

1.  Total debt = $58.3 billion
2.  Cash and cash equivalents = $73.4 billion
3.  Marketable securities = $13.4 billion

Net debt = $58.3 billion - $73.4 billion - $13.4 billion  
**Net debt = -$28.5 billion**

The negative net debt in both years indicates that Amazon had significantly more cash and liquid assets than debt. In 2024, Amazon's net debt position was even more negative than in 2023, showing the company increased its cash cushion relative to its debt.

This strong cash position gives Amazon tremendous financial flexibility to invest in new initiatives, weather economic downturns, or make strategic acquisitions without raising additional capital.  

## Net Debt Measures and Ratios

Financial analysts typically combine net debt with other data points to judge how efficient and financially stable a firm is:

*   [**Net-debt-to-EBITDA**](https://www.investopedia.com/terms/n/net-debt-to-ebitda-ratio.asp) measures how long it would take a company to pay off its total debt using its present operational income and available cash reserves. Companies with debt ratios below 3.0 are said to be in good shape but anything over 5.0 could mean they're having to borrow too much. What are acceptable debt levels vary widely among different industries. Capital-heavy sectors such as telecommunications or mining usually have higher ratios than those in the service industries.
*   **Net-debt-to-equity** tweaks the better-known [debt-to-equity](https://www.investopedia.com/terms/d/debtequityratio.asp) ratio by evaluating net debt against shareholders' equity after subtracting cash reserves. Companies that have higher net debt-to-equity ratios may offer better shareholder returns during expansions by borrowing to attain higher growth, but this comes with obvious risks as the debt piles up.
*   **Net-debt-to-free-cash-flow** is a practical way to understand how long it would take a company to pay off all its debt using the cash it generates after covering its operating expenses and investments. Imagine a company with $100 million in net debt that generates $25 million in [free cash flow](https://www.investopedia.com/terms/f/freecashflow.asp) each year—it would take about four years to eliminate that debt if all free cash were dedicated to debt repayment.

### Interest Coverage Ratio With Net Debt Considerations

Traditional [interest coverage ratios](https://www.investopedia.com/terms/i/interestcoverageratio.asp) take [EBIT](https://www.investopedia.com/terms/e/ebit.asp) and divide it by interest expenses. But you can just as easily incorporate net debt positions. The adjustment recognizes that any interest income from cash balances also helps to reduce the interest payments made on debts.

### Enterprise Value Calculations:

Enterprise Value ([EV](https://www.investopedia.com/terms/e/enterprisevalue.asp)) includes net debt as a primary component:

> EV = Market Capitalization + Net Debt + Preferred Equity + Minority Interest.

This measure thus combines equity with debt components in company financing, which supports acquisition analysis and cross-organizational comparative valuations.

## The Bottom Line

Net debt offers a more detailed view of a company's real liabilities by subtracting available cash from total debt. You can also use it to make better comparisons among similar firms, even if they have distinct [cash management](https://www.investopedia.com/terms/c/cash-management.asp) approaches.

Net debt is usually combined with other financial metrics and operational indicators for [fundamental analysis](https://www.investopedia.com/terms/f/fundamentalanalysis.asp). Acceptable net debt levels vary across industries and also depend on capital intensity, growth outlook, and the business cycle.

> **Article Sources**
>
> 1.  Amazon. "[SEC Filings Details](https://ir.aboutamazon.com/sec-filings/sec-filings-details/default.aspx?FilingId=18165478)."