Financial Debt vs Net Financial Debt

Financial Debt and Net Financial Debt measure a company's indebtedness in different ways, providing complementary perspectives on financial leverage. Financial Debt encompasses all interest-bearing obligations a company has, including short and long-term loans, bonds, notes payable, and capital leases, representing the total borrowed funds that must be repaid with interest. Net Financial Debt takes this measurement a step further by subtracting a company's cash and cash equivalents from its Financial Debt, providing a more realistic view of actual debt burden by acknowledging that readily available cash could potentially be used to pay down debt obligations.

A manufacturing company considering expansion should focus on Financial Debt when evaluating its total repayment obligations or calculating interest expense forecasts, as this metric shows the full extent of borrowing commitments regardless of cash position. For instance, if a company has $10 million in loans and bonds with varying interest rates, understanding the complete Financial Debt picture helps determine overall interest expenses and future repayment requirements. Conversely, the same company would emphasize Net Financial Debt when communicating with investors about financial health or making strategic decisions about additional borrowing capacity. If the company holds $3 million in cash against its $10 million Financial Debt, the Net Financial Debt of $7 million presents a more favourable picture of its effective leverage position, potentially supporting the case for responsible additional borrowing to fund growth initiatives.