How Do I Calculate Net Debt?
If you need to calculate net debt, or the overall amount of debt a business has, then you can do so with a basic formula that requires three factors. Short-term debt is any bill against the business that must be paid in less than a year. Long-term debt, such as loans or mortgages, includes any bills that can be paid within a year or more — a figure that usually is higher than short-term debt, but not always. Money and liquid assets, or any assets that can be quickly turned into money, are funds the business currently has; when you calculate net debt, this goes against the debts. While a business may find this useful, investors more commonly use this formula.
You can begin to calculate net debt by determining the sum of the business’s short-term debt. This includes any bills or liabilities that must be paid within a year, including those for supplies, inventory expenses and common operating costs. One should only factor the business’s current short-term debt, not future costs, into the calculation.
Long-term debt includes any bills and liabilities that a business must pay within a year or longer and, coupled with short-term debt, this typically represents all the money the business currently owes in debt. Long-term debt commonly stems is from loans, mortgages and construction projects. As with short-term debt, these figures should be added together.
The next step is to determine how much money the business has available to pay these debts by adding the business’s current cash and liquid assets. Such assets, such as stocks or sellable inventory, can quickly be turned into money. In this calculation, "money" is simply the amount of free funds the business has available to pay debts.
Short-term debt and long-term debt should be added to get the full amount of the business’s current debt. After that, the money and assets should be subtracted from the full debt amount to calculate net debt. When you calculate net debt, getting a negative number is good. For example, if the total debt amount is $50,000 US Dollars (USD) and the money is $60,000 USD, then the net debt is -$10,000 USD. This means the business would have $10,000 USD left if all the debts were called in.
While this formula may be useful to a business, most people calculate net debt because they are investors. Knowing the net debt, and the business’s debt trend, gives you a metric by which to measure how well the business uses its money and manages its debt. If the business has a number of years with positive net debt, then this may mean the business can fold at any time and may not be a safe investment.
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