What are simple net debt and coverage?
Reveal the worked answer
250 million and 7.5×.
400−150; 150/20.
Fundamentals · FUND-05 · Core
Balance-sheet resilience
Can the business finance a difficult period?
What you will learn and prerequisites
- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.
Read first: Understand the business
The balance sheet identifies resources and claims at a date. Cash availability, maturity timing, covenants and contingent obligations matter alongside total leverage. A solvent-looking company can still face a liquidity problem.
The amount of cash is less useful if it is restricted or required to operate.
Understand the mechanism
Simple net debt subtracts cash from debt, but not all cash may be usable for repayment. Interest coverage indicates earnings relative to interest, not the ability to pay a large principal maturity.
Fixed versus floating costs, refinancing access and cyclicality alter the risk even with unchanged debt totals.
Walk through the process
Build a maturity and cash-source schedule. Stress operating cash and coverage during a downturn. Read footnotes and commitments rather than relying solely on a ratio.
Compare leverage with stability and reinvestment needs. Peak-cycle earnings can make fragile debt look comfortable.
Evidence and decision boundary
These are original fictional teaching figures, not a company screen. Actual analysis should use primary disclosures and distinguish management's explanation from your inference. Favorable or unfavorable evidence depends on the specific business, valuation and risk; no single ratio establishes a recommendation.
A worked example
Harbor has debt 400, cash 150, EBIT 150 and interest 20. Simple net debt is 250 and interest coverage 7.5×. Suppose 200 matures next year but only 80 cash is freely usable after operating requirements.
Refinancing still matters despite the apparently strong coverage. The chart contrasts claims and resources without assuming their timing matches.
Open the calculation without leaving this lesson
Balance-sheet resilience—worked comparison
Vertical: USD millions
Horizontal: Debt / cash / net debt / maturity / available cash
1. Fictional example
Read the graph as a data table
| Debt / cash / net debt / maturity / available cash | Fictional example |
|---|---|
| 1 | 400 |
| 2 | 150 |
| 3 | 250 |
| 4 | 200 |
| 5 | 80 |
What would invalidate the reading?
A low net-debt number can conceal restricted cash or a concentrated maturity. Coverage based on peak earnings can disappear when refinancing is needed.
Check your understanding
Try the question before revealing its answer. These are reading checks, not trading certification or a site completion record.
What is the critical failure to avoid?
Reveal the worked answer
A low net-debt number can conceal restricted cash or a concentrated maturity. Coverage based on peak earnings can disappear when refinancing is needed.
Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome.
Return to the question: Can the business finance a difficult period? State the observed facts, the assumptions and the failure condition separately.
Sources, assumptions and downloadable script
External references support definitions and conventions. Worked scenarios and prose are original. No current quotes or dealer inventory are claimed.
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