Net Debt
Net debt is total borrowings minus cash and equivalents, the debt burden that actually matters. A company owing $500M while holding $400M of cash sits in a very different position than one owing $500M against empty accounts, and net debt is the figure a rational acquirer of the entire business would count on assuming.
The math
Total debt of $500M against $180M of cash leaves $320M of net debt. An investor buying the equity at a $1B market cap is economically paying $1.32B for the enterprise.
On $80M of net income, the stock’s 12.5 P/E flatters what is closer to 16.5 times on an enterprise basis.
| Market cap lens | Enterprise lens | |
|---|---|---|
| Price of the business | $1B | $1.32B |
| Multiple on $80M profit | 12.5x | 16.5x |
Refinancing risk sharpens the point: roll that $320M from a 4 percent coupon to 8 percent and interest expense climbs by $12.8M a year, erasing 16 percent of profit without a single operational misstep.
The trap
Comparing P/E ratios across companies with different balance sheets. Leverage inflates earnings per share and return on equity in good times, so the most indebted competitor often screens as the cheapest and the most profitable at once.
The multiple looks like a bargain precisely because the balance sheet is doing hidden work, and that work reverses violently in a downturn.
The move
Value on enterprise value rather than market cap, so debt and cash get priced in automatically. Gauge capacity with net debt against EBITDA, and read the maturity schedule for walls of borrowing coming due in any single year.
Treat a portion of cash as operationally required rather than surplus, and remember that lease obligations are debt wearing a different name.