Net debt tells us not to look just at the level of debt that a company has but to net off any cash balances or cash equivalent balances This will give us a truer indication of the real indebtedness of a company So the kind of things that we might include as cash would be: cash, cash equivalents. any commercial paper held as an asset (not commercial held as a liability) Any short term deposits the company has or any money market instruments These are all highly liquid assets that could very quickly be turned into cash and used to pay off debt So what do we include as debt? Well it's rather a long list. The top 6 are all short term items or current liabilities in debt And the bottom ones are all longer term items Ones to point out include the bottom one, preference shares if treated as debt Preference shares do have a tendency in a valuation situation to be treated as debt Also above that, capital or finance leases. These are debt equivalents Operating leases are slightly different and they may need a little bit more work And lastly, convertible debt Convertible debt can be turned into equity So we don't want to include the equity portion, we only want to include the bond proportion But again, a little bit more work is needed there Now why is it important to look at net debt? Well imagine if I was looking at my credit card and I thought "Oh my god, I've got 10,000 of debt, I'm really really scared about my future" But hang on, I then look at my cash and I've got 9,900 of cash sat in the bank What's my true indebtedness? My true indebtedness is not 10,000 It's 10,000 minus the 9,900 So my net debt is really only 100. Not quite so worrying after all