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Net Debt vs Growth Debt

by | May 16, 2022

Should You Look at Net Debt or Gross Debt?

What Is Net Debt?

Net debt is the amount of money your company owes minus any cash that’s on hand. That might sound like an easy concept to grasp, but in practice you have to be careful about how you calculate net debt. For example, if a company has R50 million in cash and R10 million in debt, its net debt would be -R40 million—that is, the negative value of its borrowings rather than the absolute value. And while this number looks straightforward enough on paper (if you add up all those digits), it gets more complicated when we start talking about business units or geographical locations.

It’s also important to note that net debt isn’t always what investors are looking for when making investment decisions. Some companies may choose instead to focus on gross debt since it gives them a clearer picture of how much money they owe as opposed to how much cash is flowing into their coffers right now. That could help determine whether or not there will be sufficient funds available down the road.

Net Debt vs Growth Debt

What Is Gross Debt?

Gross debt is the total amount of debt a company has, including all short-term and long-term obligations.

It includes all interest-bearing debt as well as noninterest bearing liabilities such as deferred revenue (any money owed on an account that will be paid in the future).

How Are Net Debt and Gross Debt Similar?

Net debt and gross debt are similar in that they both measure a company’s debt. But there are important differences between them. Both net debt and gross debt include long-term and short-term debt, plus the current portion of long-term debts. However, net debt also subtracts cash from liabilities. Net Debt is considered a more conservative figure compared to Gross Debt because it excludes some assets (cash).

How Do Net Debt and Gross Debt Differ?

Let’s break down the difference between net debt and gross debt.

  • Gross debt is the total amount of money borrowed by a company or country for any purpose—such as to fund operations, purchase assets, pay dividends or make investments—minus cash and liquid assets (e.g., currency on hand). So if you owed R10,000 in credit card bills and had R10,000 deposited into your checking account at any given moment, your gross debt would be zero. That’s because although your overall balance was negative due to those outstanding bills (i.e., -R10K), there was plenty of cash on hand (R10K) to cover it.
  • Net debt shows how much a company owes after subtracting cash from its liabilities. If we were talking about an actual person here instead of an entity like a corporation or government entity. (for example: John Smith), net worth would be his total assets minus all his obligations—including loan amounts owed but not yet paid off; outstanding balances on credit cards; mortgages; student loans; etc.—plus whatever money he has stashed away in savings accounts and other safe investments such as CDs that aren’t immediately accessible without penalty charges (if applicable).

Who Uses Net Debt and Gross Debt Information?

  • Debt investors and lenders
  • Credit analysts
  • Financial planners
  • Credit rating agencies

To understand your finances, it is important to know the difference between gross debt and net debt.

Gross debt is a company’s total outstanding debt, including short-term and long-term liabilities. Net debt, on the other hand, is gross debt minus cash and cash equivalents such as marketable securities. It’s important to understand both types of debts because they can give you insight into a company’s financial health.

For example, when you subtract the value of your car from its total cost (the loan amount), what remains is your net balance owed on this vehicle. This figure is far more useful than knowing just how much money you owe if it doesn’t include what your asset is worth in addition to its outstanding balance.

Net debt also has application in calculating a company’s debt-to-equity ratio (D/E). This ratio compares how much money was borrowed against how much equity was invested (typically by shareholders) for each dollar of sales revenue or assets owned by the firm.

If you need help with your debt in South Africa Real Estate Assist would love to help you and empower you on your financial freedom journey.

Disclaimer: The information provided in this blog is for general informational purposes only and should not be considered legal or property advice. We do not take responsibility for any actions taken based on the information provided in this blog. It is always recommended to seek professional advice for your specific legal or property needs. Contact us (Real Estate Assist) if you seek such advice and we will appoint a professional from our team to be of assistance.

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Please Note: We are unable to provide assistance if you do not own a property. Real Estate Assist specializes in helping property owners who are experiencing challenges with their mortgage payments. If you own a property and require support with debt consolidation without going through the debt review process, our team is here to help you explore options to unlock the equity in your home for necessary family matters.

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