Calculation of net debt

Fundamental Analysis
1

Should we include the long term borrowings (>12months) for the calculation of NET DEBT which has to be used in DCF model? Or should we just include the borrowings under “Current liabilities”?

Consider a case where the company has been generating enough profits such that it is able to service its debt every year even during crisis as it has strong cash balance. The company is not paying off its debt as it wants to expand and take advantage of probable future high profit margins compared to industry peers.

Considering the above scenario, should we include the long term borrowings (>12months) for the calculation of NET DEBT?

2

@Karthik Sir, can you.

3

Yes, you need to.

Net Debt = (Short term debt + long term debt) - Cash and Cash Equivalent.

The idea behind calculating net debt is to identify the total debt obligation and therefore the company’s solvency position, in case the company has to repay its entire debt today.

Given this objective, it makes sense to include all debt of the company.

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