Net interest-bearing debt (NIBD)

Net interest-bearing debt is the total amount of debt a company has that carries interest costs. That is, how much debt a company has taken on to finance operations or investments and on which it must pay interest. Interest-bearing debt is, for example, a bank loan to the business, whereas debt that is not interest-bearing is, for example, trade payables or tax payable.

How do you calculate net interest-bearing debt?

Net interest-bearing debt is calculated by adding up the company's interest-bearing debt obligations, that is, loans and other debt that carry interest costs, and then deducting cash and cash equivalents. Debt without interest, such as trade payables and tax payable, is left out of the calculation.

Net interest-bearing debt = Interest-bearing debt – Cash and cash equivalents

What can net interest-bearing debt be used for?

Interest-bearing debt is often used by businesses to finance investments and operations. For investors, taking on interest-bearing debt can also be a way of increasing the scope for a return on their investments.

High net interest-bearing debt can mean several things. It can be an indicator that a company has many new projects or investments that it has taken on interest-bearing debt to finance. It can also mean that the company has poor earnings or poor equity financing, and has therefore needed to take on interest-bearing debt in order to run the business. High net interest-bearing debt is also common in companies that wish to operate with high risk, among them the property sector, since a high level of interest-bearing debt relative to equity gives greater scope for a return when total capital is higher. High interest-bearing debt is often the case in companies in the start-up or growth phase.

Low net interest-bearing debt can mean that a company has more mature projects and investments where part of the debt has already been repaid. It can therefore mean that the company is profitable and has been able to repay its debt. It can also mean that the company has had no need for financing other than equity. In general, low net interest-bearing debt means that a company is operating with less risk, but it also reduces the scope for a return. Low interest-bearing debt is often the case in mature, established companies.

Tips for increasing or reducing net interest-bearing debt

Unless a company deliberately carries a lot of interest-bearing debt in order to increase the scope for a return, low net interest-bearing debt is generally favourable. Increasing and reducing the debt is in itself straightforward, since it simply involves, for example, taking out or repaying loans. It is, however, rather more complicated to reduce net interest-bearing debt if the company does not generate enough cash flow to repay the debt.

To improve the scope for reducing net interest-bearing debt, it is useful to look at the profitability of operations and at cash generation. If you succeed in increasing earnings, and thereby also cash flow, this can lead to a larger cash balance that can be used to repay debt.

1. Pricing. Consider how the product is priced relative to competitors.
2. Marketing. How effective is the marketing strategy?
3. Supply and demand. Examine the market and whether the product meets supply and demand.
4. Quality. Consider how the quality of the product compares with competitors.
5. Customer service. Consider how good the company's customer service strategy is.
6. Customer surveys. What do customers say about the product?
7. Efficiency. Examine how efficient the company is in product development, production and sales.
8. Products. Which products sell best, and why?
9. Customers. Examine how good the company is at retaining customers, and why.
10. New customers. Examine how good the company is at winning new customers, and why.

Advantages and disadvantages

The advantage of interest-bearing debt is that it gives companies the means to finance their operations. The disadvantage is that it brings additional interest costs that have to be paid over a given period.