Which formula correctly calculates net debt?

Which formula correctly calculates net debt?

• A. Net debt = cash minus debt
• B. Net debt = debt plus cash
• C. Net debt = debt minus cash
• D. Net debt = cash plus short-term investments

Answer: (C)

Net debt measures how much debt would remain after using available cash to pay it down. You subtract the cash on hand (and cash equivalents) from the total debt. This yields a positive number when debt exceeds cash, or a negative number if cash exceeds debt, indicating a net cash position. Therefore the correct formula is debt minus cash. The other ideas mix in cash inappropriately or treat assets that aren’t debt as part of the calculation, which doesn’t reflect the concept of paying down debt with cash.

Net debt measures how much debt would remain after using available cash to pay it down. You subtract the cash on hand (and cash equivalents) from the total debt. This yields a positive number when debt exceeds cash, or a negative number if cash exceeds debt, indicating a net cash position. Therefore the correct formula is debt minus cash. The other ideas mix in cash inappropriately or treat assets that aren’t debt as part of the calculation, which doesn’t reflect the concept of paying down debt with cash.