Gross Debt versus Net Debt

The debate is ongoing -- Gross Debt on one side and Net Debt (Gross Debt - Cash and Cash Equivalents) on the other side.

If an investor puts his/her reliance on Investopedia to understand on which of these two--gross debt and net debt--he/she should put his/her reliance on, in order to gauge more accurately the liquidity and solvency aspects of a company, then this is what Investopedia will tell him/her at https://www.investopedia.com/ask/answers/042415/why-would-you-look-companys-net-debt-rather-its-gross-debt.asp :

"Gross debt is the total amount of debt a company has at a certain point in time.... Net debt essentially tells you how much debt is left on the balance sheet if the company pays all its debt obligations with its existing cash balances.... If the difference between net debt and gross debt is substantial, this indicates that the company is carrying a large cash balance as well as significant debt. Why would a company carry both a large cash balance and substantial debt? There are many reasons such as liquidity concerns, capital investment opportunities, and planned acquisitions....."

All that is fine but the way I look at it is that the Cash and Cash Equivalent figures provided by listed companies as a part of the Cash are not signed by any auditor. Many listed companies include financial investments in the calculation of Cash and Cash Equivalents, and making matters worse is that they do not provide a detailed break-up of their claimed Cash & Cash Equivalent figures. And, then, if you do not want to ignore what happened in the case of Satyam Computers Ltd several years ago, then you will also wonder whether the Bank Balance figures which are included in Cash & Cash Equivalent are accurate or not.

A prudent investor will therefore not put his/her reliance on the Net Debt and will instead focus on the Gross Debt. That's my view.

Now, in this week that has just ended, a listed company disclosed its Oct-Dec 2022 quarter financial results. Among several aspects disclosed was the debt position of the company.

The consolidated and standalone financial statements disclosed were only the Profit & Loss statement for the quarter ended December 2022. The Balance Sheet statement as of 31 December 2022 was not among the disclosures.

But in the Investor Presentation separately disclosed by the company soon after disclosing the financial statements, it gave the following break-up of the consolidated Debt position of the company in the December 2022 quarter:

Gross Debt Rs 3,03,530 crore (vs Rs 2,94,860 crore as of Sep 30, 2022) (thus, up 3%)

Cash & Cash Equivalent Rs 1,93,282 crore (vs Rs 2,01,605 crore) (thus, down 4%)

Net Debt Rs 1,10,248 crore (vs Rs 93,250 crore) (thus, up 18%)

The company did not provide a break-up of Cash & cash equivalent.

Now let's look at the data provided in the financial statements and Investor Presentation at the end of the previous quarter ended September 2022.

The consolidated Balance Sheet as of September 30, 2022, was disclosed at that time. It gave the following data points on Debt and Cash:

Non-current borrowings Rs 1,78,395 crore (vs Rs 1,87,700 crore as of Mar 31, 2022)

Current borrowings Rs 1,16,465 crore (vs Rs 78,605 crore)

Adding up the two borrowing figures we get:

Gross Debt Rs 2,94,860 crore (vs Rs 2,66,305 crore as of Mar 31, 2022) (thus, up 11%)

Now, from the Assets part of the Balance Sheet we get the following entry:

Cash & Cash Equivalent Rs 48,258 crore (vs Rs 36,178 crore as of Mar 31, 2022) (thus, up 33%)

In that Balance Sheet, there were other Asset items like non-current financial investments of Rs 2,75,108 crore and current financial investments of Rs 70,005 crore.

Now, in the Investor Presentation disclosed immediately after the filing of the financial statements, the company gave the following data:

Gross Debt Rs 2,94,859 crore (vs Rs 2,66,305 crore as of Sep 30, 2020) (thus, up 3%)

Cash & Cash Equivalent Rs 2,01,606 crore (vs Rs 2,31,490 crore) (thus, down 13%)

Net Debt Rs 93,253 crore (vs Rs 34,815 crore) (thus, up 168%)

The company did not provide a break-up of the Cash & Cash Equivalent figure of Rs 2,01,606 crore given in the Investor Presentation. And in the financial statement-Balance Sheet-which was signed off by the independent auditor in its limited review report--the Cash & Cash Equivalent figure was much lower at Rs 48,258 crore.

So, which one should a prudent investor go by? The auditor-signed Balance Sheet or the figure given by the company, without an auditor's certificate, in the Investor Presentation?

This problem is seen in not just the above example, but in several other companies as well.

In my view, this problem can be solved if the Securities and Exchange Board of India (SEBI) amends its listing regulations, or issues a circular, requiring all listed companies to provide an auditor-verified Net Debt figure with a disclosure of the detailed composition of the Cash & Cash Equivalent figure used to calculate the Net Debt figure.

That's it for now. As Jim Carrey's character in the movie, The Truman Show, would say "Good morning. Oh, in case I don't see you, good afternoon, good evening and good night!"