馃攳
Net Debt Formula (Example) | How to Calculate Net Debt? - YouTube
Channel: WallStreetMojo
[9]
hello everyone hi welcome to the channel
of WallStreetmojo
[14]
watch the video till the end and also if
you are new to this channel then you can
[17]
subscribe us by clicking the bell ican
friends today we will learn a concept
[22]
which is known as the net debt formula
now as you can see some details on the
[27]
net debt formula which is basically a
short-term debt plus your long-term debt
[30]
minus the cash and cash equivalent now
we need to understand this the net debt
[35]
formula basically it helps us to
understand how company is doing debt
[40]
wise now in the other term it helps the
investor to have a very closer look
[46]
where company stands in terms of
liabilities so liabilities of the
[55]
company shouldn't liabilities of the
company it should not exceed it should
[61]
be less than the cash inflow of the
company otherwise it would be impossible
[66]
for the company to pay off its dues when
the time is actually due so the formula
[71]
for the net debt goes something like
this the net debt is equal to your short
[78]
term debt plus your long term debt
less any cash and cash equivalents we
[88]
just learned that right so this is the
formula we'll take a short example on
[94]
this particular formula so that we have
some good at least near by idea what
[99]
exactly is going on in this formula and
then we'll go to the interpretation part
[102]
we'll take a very simple net debt example
let's say this a company called Co tech
[107]
company and it has a great reputation in
the market John is basically let's say
[114]
John is basically a new investor and he
knows that irrespective of the great
[119]
reputation it is important to check the
financial health of the company so the
[123]
financial information he found was
something like this he got the data for
[128]
the short term debt of the company was
something like this standing at $56,000
[135]
he had the long term debt of the company
standing at $6,44,000
[143]
and he had deleted for cash and
cash equivalents standing at $2,00,000
[151]
or $2,00,000 now this is
6,44,000 and this is $2,00,0000
[156]
so using the Net debts formula we
get our answer as your net debt formula
[161]
is equal to is equal to open the bracket
your short-term debt plus your long-term
[167]
debt - any cash and cash equivalents so
5,00,000 is the amount so the
[174]
net debt of go technology company is
5,00,000 and to know whether it is
[178]
lower IO we need to look at the other
companies in the same industry so other
[186]
companies in the same industry which
issue which is very important then and
[189]
then only you'll be able to get a right
comparison which is done by the you know
[193]
there's a comp comparison or comp
valuation with comparable company's
[198]
valuation method so this is a different
altogether a different thing but at the
[203]
end of the day you are doing the same
thing you are taking other companies you
[206]
are in the same industries data and you
are trying to compare that with your
[210]
net debt formula which will give you a real
picture very exactly you are standing in
[214]
terms of the industry now we understand
the net debt of Colgate company for the
[220]
same now this is the snapshot that is
taken from the 10k filing of Colgate
[225]
which is the detail of cash and cash
equivalents for 2017 and 2016 the
[230]
current portion of the long-term debt
which is nil and the long-term debt is
[235]
over here so let's try and compute this
numbers let's take the numbers we'll
[242]
take for Colgate and this is the data
for 2017 and 2016 we have long-term debt
[251]
just copy down things over here
[257]
if there are any short-term debts we
will write that there is nothing so
[261]
we'll write zero the long-term debt we
had standing at 6566 and
[267]
6520, 6566 and
6520 so and we had the cash
[275]
in cash equivalents data that was standing at 1535 and 1315 so based on this
[282]
you can find the net debt formula as the
short-term debt - long term debt you had
[287]
less the cash in cash will in control
are so we have the data now if you
[293]
applied the formula you get this
answer 5031 and 5205 for the
[300]
the come now based on this we need to
understand the explanation portion of
[305]
this formula because that's the most
important thing in the net debt formula
[310]
we have 3 components as you can see now very well the first and the foremost
[315]
component is the short-term debt now the short-term debts are called basically
[321]
your current debts now they can be due
to I mean this can be due within less
[329]
than 1 year so current debts may
include something like this short-term
[334]
loans and short-term payments if any
this is the second thing of the law of
[341]
the of the long-term loans basically and
so on and so forth the second thing in
[346]
the formula or the second component of
the formula is basically the long-term
[351]
debt now the long-term debt is obviously
due to the long run right but the
[360]
companies need to make sure that the
long-term debt is paid off when it's due
[365]
and that may mean making a periodic
payments or you can say or paying at the
[373]
end of the Daniel third thing is the
which is the last component in our
[378]
formula is the cash and the cash
equivalents so cash and cash Equivalents
[384]
includes your cash on hand and liquid
investment
[392]
liquid investment if any
I mean without with the maturity of less
[397]
than 3 months checking accounts
Treasury bills and so on and so forth so
[402]
idea is to see by removing the cash and
cash equivalents basically it means that
[408]
you know if or how much debt would still
be left it means that if all the cash
[415]
and cash equivalents are used to pay of
the portion of the total debt of the
[419]
company how much debt would still be
left for the company to pay off now the
[425]
next thing is the use that we need to
understand what exactly is the use of
[429]
this particular formula for every
investor it is really very important to
[433]
know whether the company is doing well
financially or not so for the same they
[437]
need to check whether the company is in
financial distress if any or or not and
[445]
they you in they use a net debt formula so
this formula helps to understand the
[448]
true financial stance of the company now
a lower value is an indication that the
[455]
company is doing quite well and a larger
debt a larger number over here I mean a
[464]
larger that in a larger cash Equivalents
will result in lower net value and it
[467]
means that the company is in the great
shape financially to pay off its I mean
[471]
pay off its debt on the other hand or a
higher net value a higher net value is
[478]
basically an indication or that the
company has not been doing pretty well
[481]
financially so knowing this will help
the invest in deciding whether they
[486]
should invest in the company in the
stock of the company or not now here's
[492]
the calculator for the net debt you can
put some numbers let's say for the
[496]
short-term debt is $1,00,000
long-term debt is standing at $2,00,000
[500]
and your cash in cash equivalent
is standing at let's say 5,00,000
[504]
so your answer will be 2,00,000 means if your cash is more than me
[511]
that means you have 2,00,000 extra
window.open to pay off your to operate
[516]
in the business but if we change this to
5,00,000 then automatically we will have
[522]
your net debt formula is 1,00,000 so
even after having
[524]
5,00,000 in your cash flows you still
have to pay your debt up to 1,00,000
[529]
that means 1,00,000 and 5,00,000 is a
debt and available cash is only 5,00,000
[533]
still you have to pay 1,00,000 more so
this is how you can put your own numbers
[537]
punch in your numbers and come out with
really good results so that's it for
[542]
this particular topic if you have
learned and enjoyed watching this video
[545]
please like and comment on this video
and subscribe to our channel for the
[549]
latest updates thank you everyone
Cheers
Most Recent Videos:
You can go back to the homepage right here: Homepage