We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Accounting

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

How Do I Calculate Net Debt?

By Alex Newth
Updated: May 16, 2024
Views: 21,123
References
Share

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.

Share
SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Link to Sources
Discussion Comments
Share
https://www.smartcapitalmind.com/how-do-i-calculate-net-debt.htm
Copy this link
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.