Net Debt

What it is

Net debt is the simplest, most important number on a company's balance sheet for most equity investors: total debt minus total cash. A company with £500m of borrowings and £200m of cash has net debt of £300m. A company with £100m of borrowings and £400m of cash has net cash of £300m.

Net cash is the mirror: it means the company has more cash than debt, and is effectively sitting on financial reserves that could be returned to shareholders or deployed into acquisitions.

How to calculate it

"Total borrowings" should include all financial debt: bank loans, bonds, lease liabilities (post-IFRS 16), and any drawn revolving credit facilities. Do not include trade payables — those are operational liabilities, not financial debt.

The IFRS 16 adjustment is particularly relevant in the UK. Since 2019, companies must capitalise operating leases onto the balance sheet, which significantly inflated the reported debt of retailers, airlines, and pub groups overnight. Always check whether an analysis is pre- or post-IFRS 16 when comparing across periods.

Why it matters more than absolute profit levels

A company can be highly profitable and simultaneously financially fragile. Carillion was profitable right up until it wasn't. Thomas Cook reported earnings while sitting on debt it couldn't service. The P&L statement tells you about the past. Net debt tells you about the margin of safety.

The ratio most analysts use to contextualise net debt is Net Debt/EBITDA — essentially asking "how many years of operating earnings does it take to repay the borrowings?"

• Below 1.0x: Conservatively financed. Minimal financial risk.
• 1.0–2.0x: Normal for most sectors. Comfortable.
• 2.0–3.5x: Manageable but worth monitoring. Less resilience to a downturn.
• Above 3.5x: Elevated. CapEx-heavy businesses or those in downturn risk covenant breaches.
• Above 5.0x: Distressed territory unless the business has exceptionally stable, contracted cash flows (utilities, infrastructure).

Sector context is everything

Debt is not inherently bad. In fact, a business that can borrow at 5% and earn 20% on that capital is creating shareholder value with leverage. The question is whether the business can service the debt across a full economic cycle.

Utilities and infrastructure companies carry high absolute debt levels routinely, because their revenue is regulated and predictable. National Grid or Severn Trent running at 5–7x Net Debt/EBITDA is unremarkable. A discretionary retailer at the same leverage level is a different matter entirely — one bad Christmas trading period and the banks start asking questions.

Banks are a special case: they are, by design, leveraged institutions and should not be evaluated using standard Net Debt/EBITDA frameworks.

Red flags to watch for

Debt growing faster than EBITDA: if borrowings are rising and earnings aren't keeping pace, the leverage ratio is deteriorating. This is often masked in good times and exposed in downturns.

Debt maturity wall: check the maturity profile. A company with £1bn of bonds maturing in 18 months, in a high-interest-rate environment, faces refinancing risk even if the current business is profitable. This is rarely disclosed prominently in investor presentations.

Off-balance-sheet arrangements: before IFRS 16, many retailers and airlines obscured leverage by keeping leases off the balance sheet. Always read the notes on contingent liabilities and commitments.

Net debt "excluding acquired debt": some companies exclude the debt of recently acquired businesses from their covenant calculations. Check whether the definition of net debt in the company's covenant agreements matches what management is reporting to investors.

Not financial advice. Always review the full balance sheet notes and debt maturity schedule.