ruly Net cash: when cash exceeds debt
Definition of net cash, its formula, where to find cash and debt in an annual report, its link with FCF, the traps of cash that is not freely available and the sectors excluded.
Published
Definition
Net cash is a company’s cash and short-term investments minus all of its financial debt. When it is positive, the company could repay all of its debt with the money it has. It is the opposite of net debt. For a growing company, it shows how long the business can fund itself without raising money.
Formula
Net cash = cash and cash equivalents + short-term investments − short and long-term financial debt
Where to find it in an annual report
Cash and cash equivalents appear on the assets side of the balance sheet, financial debt on the liabilities side, as current and non-current. The note on borrowings often gives net debt or net cash already calculated. FCF is calculated from the cash flow statement.
Common thresholds
Reasonable growth: a yes or no criterion, met if net cash is positive or if FCF for the last financial year is positive. The company can then fund its growth without depending on the markets. A company with negative net cash and negative FCF has to raise money, often at the cost of dilution.
In the preset strategies
| Preset strategy | Criterion met | To monitor | Criterion not met |
|---|---|---|---|
| Reasonable growth Net cash or positive FCF | Yes | No |
Pitfalls
- Part of the cash may not be freely available: kept abroad, pledged as collateral to a lender, or made up of customer deposits to be refunded.
- Cash at the balance sheet date can be unusually high: also look at its average level when the company publishes it.
- Net cash that is positive but shrinks every year with losses gives a limited funding runway: divide it by the annual cash burn.
- Lease liabilities (IFRS 16) are included or not depending on the company: check the definition used.
Where it does not apply
- Banks and insurers: their cash and their debt are part of the business, so the notion makes no sense.
- Real estate companies and concessions, financed by structural debt backed by assets: negative net cash is normal there.
A worked example
A fictitious software company, called Company AD here, has €180 million of cash and short-term investments, against €60 million of financial debt. Its net cash is €120 million. Its FCF is still negative, at −€30 million a year: the criterion is met thanks to net cash, which covers about four years of cash burn at the current pace.
Net cash and net debt
The two measures are the same thing with the sign reversed. The net debt to EBITDA entry explains how to compare debt with the repayment capacity of an indebted company.
Sources
- Annual reports of listed companies (balance sheet, note on borrowings, cash flow statement)