Net debt

Definition

Net debt is total interest-bearing borrowings less cash and cash equivalents. It strips out the cash a company could use immediately to repay debt, giving a truer picture than gross debt.

In plain terms

A business sitting on plenty of cash is less indebted than its loan balance suggests. Net debt shows the position after that cash is netted off.

Why it matters for your company

Lenders judge leverage on net debt — via net debt/EBITDA and gearing. Keeping net debt in check widens your options and lowers your rate. Check leverage with the gearing ratio calculator.

In practice

Picture a UK limited company carrying a mix of a term loan and a revolving facility, with a healthy operating bank balance built up from recent trading. Looked at in isolation, the loan balance might seem heavy. Once the cash sitting on the balance sheet is set against it, the picture softens — that cash is available to pay borrowings down at short notice if the director chose to.

The reverse is just as instructive: a company with a smaller loan balance but a thin or depleted cash position can actually be more exposed, because it has less of a buffer to fall back on if trading slows. This is why directors reviewing management accounts tend to track the net figure through the year rather than the gross borrowings line alone — it moves with both sides of the equation, financing and cash generation, not just the financing side.

How lenders read it

When a lender assesses a limited company, net debt is rarely read alone — it is set against EBITDA to judge how many years of underlying earnings it would take to clear the position, and folded into gearing to judge the balance between borrowed money and shareholder funds. A falling net debt trend across successive year-ends tends to read as a business converting profit into cash and choosing to reduce borrowings, which supports the case for further funding on reasonable terms.

A rising trend does not automatically count against a company — it can simply reflect a deliberate, planned drawdown to fund growth — but it does prompt closer questions about what the additional borrowing is funding and how it will be serviced. Directors who can explain the story behind the movement, not just quote the figure, tend to have an easier conversation.