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Emphasizing debt net of cash can be misleading
Many companies have a combination of cash balances
and bank debt for various reasons. In an effort to show themselves in a
stronger position, more and more companies are reporting debt net-of-cash
balances. In some cases the presentation is fine. For example, financial
companies often have tons of cash on their balance sheets, but most of it is
often restricted to payoff its debt holders. This is an instance where a
debt net-of-cash calculation is appropriate. The intended use of the cash
should dictate how management reflects it on financial reports. If the
purpose is to eventually pay down debt, then a debt net-of-cash presentation
is fine. If, however, the use of cash is restricted and/or intended for
other purposes, then a debt net-of-cash calculation may be inappropriate.
Moreover, if there is no intent to pay down debt,
showing a net debt calculation is actually misleading to investors.
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