Explanation :It’s an indication of a company’s ability to pay off its debts only using cash and equivalents in the event that the company has to shut down. Although this shut down concept is rarely a reality, it demonstrates an important point about the company’s liquidity. It shows how leveraged the company is and also shows how much cash the company keeps on hand. Both of these concepts are important.If a company has a regular amount of liabilities and a low amount of cash reserves, its metric would be high. This doesn’t necessarily mean the company is over leveraged. It simply means the company doesn’t keep much cash in its bank account. For example, the company might simply use a high percentage of its cash to reinvest in inventory or capital assets.
In a nutshell :
- Net debt is a liquidity metric used to determine how well a company can pay all of its debts if they were due immediately.
- Net debt shows how much cash would remain if all debts were paid off and if a company has enough liquidity to meet its debt obligations.
- Net debt is calculated by subtracting a company's total cash and cash equivalents from its total short-term and long-term debt.