Which statement best describes net debt?

Which statement best describes net debt?

• A. Net debt equals total debt minus cash and cash equivalents.
• B. Net debt equals cash plus investments.
• C. Net debt equals equity minus debt.
• D. Net debt equals total assets minus liabilities.

Answer: (A)

Net debt measures a company's leverage after considering its most liquid assets. It is calculated as total debt minus cash and cash equivalents, meaning the amount of debt that would remain if the company used its cash to pay down debt. This can be negative if cash exceeds debt, indicating a net cash position. This measure is commonly used in valuation and liquidity analysis, especially in calculating enterprise value. Debts typically include short- and long-term borrowings, while cash and cash equivalents cover cash on hand and highly liquid, near-term investments. The idea of cash plus investments describes overall liquidity rather than debt, equity minus debt gives net equity, and total assets minus liabilities equals equity, so none of those match net debt.

Net debt measures a company's leverage after considering its most liquid assets. It is calculated as total debt minus cash and cash equivalents, meaning the amount of debt that would remain if the company used its cash to pay down debt. This can be negative if cash exceeds debt, indicating a net cash position. This measure is commonly used in valuation and liquidity analysis, especially in calculating enterprise value. Debts typically include short- and long-term borrowings, while cash and cash equivalents cover cash on hand and highly liquid, near-term investments. The idea of cash plus investments describes overall liquidity rather than debt, equity minus debt gives net equity, and total assets minus liabilities equals equity, so none of those match net debt.