Definition: What is Net Debt Ratio?
Net Debt Ratio is the financial ratio which is used to measure the ability of the company or firm to pay all of its obligations by comparing the total debt of the company or firm with its liquid assets.
In other words, relative to the liquid assets of the company how much debt has a company. Thus demonstrating its ability to pay off the debt immediately if it were called any time.
For the management as well as for investors Net debt calculation is so important because it shows the ability of the company to handle its current obligations and if the company has the ability to take on more debt in future.
If the result of the net debt ratio is more then 1 it means that the company has more debt as compared to the current assets of the company.
If all the creditors of the company call for the debt at the same time then the company can’t pay the debt due to which company need to sell its long term assets.
If Net debt results less then 1 then the company easily pay all of the obligations because the company has more liquid assets as compared to debt.
Financial Ratio is a forum where you will learn about all ratios definitions and formulas.