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 paper. That is a liability.

Any short-term deposits the company has or any money market instruments.

You might also include short-term Investments or marketable securities.

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? While it's rather a long list the top six are all short-term items or current liabilities and the bottom ones are all longer term items.

Once to point out include the bottom one preference shares if treated as debt preference shares do have a tendency in evaluation 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 portion. 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 gosh, I've got 10,000 of debt.

I'm really really worried. But hang on I then look at my cash.

I've got 9,900 of cash in the bank.

So what's my true indebtedness? Well, my true indebtedness is not 10,000. It's 10,000 minus the 9,900 cash.

So my net debt is really only 100 not quite so worrying after all.