Plain definition
Net debt subtracts eligible cash and cash equivalents from defined borrowings. It shows how much debt would remain if that cash were applied to repayment. The calculation must state whether debt includes overdrafts, leases, and shareholder loans, and which cash balances are eligible.
Cash held as security or otherwise restricted may be unavailable to repay ordinary borrowings. Operating cash is different: it may be unrestricted and included in the ratio, yet still needed for payroll and suppliers.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A company has loans of and bank cash of . is restricted, leaving eligible under its chosen definition. Net debt is .
The next cash forecast shows that of the unrestricted balance is needed to keep operating. Only is available for immediate repayment without using that buffer. The net-debt calculation has not changed; the repayment decision answers a different question.
Why it matters
A business can report low net debt and still face a payment shortage. The ratio nets two balances at one date; it does not match cash receipts with the dates loans, wages, and suppliers must be paid.
Practical consequence
Reconcile each debt and cash balance, identify restrictions, and state the definition beside the result. Then use a dated cash forecast to decide how much can actually be repaid. Calculate lender covenants separately if the contract uses different inclusions.