Net Debt is a company's total financial debt minus its cash and liquid equivalents. It answers a simple but important question: if the company immediately used all available cash to repay borrowings, how much debt would remain?
In shipping and mining — two sectors where I spend most of my analytical time — net debt determines everything from dividend sustainability to acquisition capacity to survival in a downcycle. A tanker company with $3bn in gross debt but $1.2bn in cash has net debt of $1.8bn. That cash cushion matters enormously when freight rates collapse and the company needs 18 months of runway without refinancing.
Key components:
Gross debt figures appear in balance sheets and credit agreements. Net debt is the investor-relevant number because cash is available to service or retire debt. Two companies with identical gross debt look identical until you check cash balances:
| Company | Gross Debt | Cash | Net Debt | Interpretation |
|---|---|---|---|---|
| Tanker Co A | $2.0bn | $1.5bn | $0.5bn | Net cash buffer — flexible, dividend-friendly |
| Tanker Co B | $2.0bn | $0.1bn | $1.9bn | Tightly leveraged — vulnerable to rate downcycle |
Same headline debt load, completely different financial resilience. This is why I always compute net debt before making a final judgement on a company's capital structure.
This ratio tells you how many years of operating cash generation it would take to repay all net debt (assuming no capital expenditure and no tax). It is the most widely used leverage metric by analysts, credit agencies, and company management teams in hard-asset sectors.
| Net Debt/EBITDA | General read | Hard-asset context |
|---|---|---|
| Negative (net cash) | Fortress balance sheet | Maximum dividend flexibility; common in mining at commodity peaks (BHP FY2022) |
| 0× – 1× | Very low leverage | Conservative management; firepower for acquisitions or higher dividends |
| 1× – 2× | Moderate leverage | Normal for well-run miners and LNG shippers with long-term charters |
| 2× – 3× | Elevated but manageable | Acceptable for contracted businesses; requires stable cash flows |
| 3× – 4× | High leverage | Dividend at risk in a commodity downcycle; watch free cash flow closely |
| 4×+ | Dangerous territory | Refinancing risk; dividends typically cut first, equity raises possible |
Net Debt/EBITDA thresholds are not universal — they depend on the predictability of the underlying cash flows:
| Sector | Acceptable Range | Comfort Level | Danger Zone |
|---|---|---|---|
| Diversified mining (BHP, Glencore, Rio) | 0× – 2× | <1.5× | >2.5× at commodity trough |
| Precious metals (Barrick, Newmont) | 0× – 1.5× | Net cash preferred | >2× (gold is volatile too) |
| Tanker shipping (spot-exposed) | 0× – 3× | <2× in rate cycle | >3× going into a rate trough |
| LNG/LPG shipping (long charters) | 1× – 4× | 2–3× with contracted cash flows | >4× without contract coverage |
| Upstream E&P | 0× – 2.5× | <1.5× at $70 oil | >3× with hedging gaps |
| Midstream pipelines | 3× – 5× | 4–4.5× (fee-based, stable) | >6×; regulatory risk changes equation |
Since the adoption of IFRS 16, operating leases are capitalised onto balance sheets. For shipping companies that charter-in vessels (paying daily hire to other owners instead of owning their own ships), this creates reported debt that is really a service contract obligation — not a true financial claim on the company's equity.
When comparing a ship-owner against a charter-heavy operator, you need to be consistent:
The danger is mixing the two — using IFRS 16 figures for one company and pre-IFRS 16 for another. I flag this explicitly in every comparative analysis I run on shipping stocks.
Net debt is my first checkpoint when assessing dividend safety for a hard-asset company. A high dividend yield paired with high net debt is a warning sign — the company may be distributing cash it needs for debt service or capital expenditure.
My threshold: if Net Debt/EBITDA exceeds 2.5× and the trailing dividend yield exceeds 8%, I stress-test the dividend against a 30% EBITDA decline scenario. If the payout ratio on stressed EBITDA minus interest cost exceeds 80%, the dividend is at risk. This is the single analysis that has most often separated sustainable high-yield from dividend traps in my watch universe — shipping, mining, upstream energy and infrastructure stocks.
For deeper analysis of capital structure and how it affects returns over a full cycle, see also: Enterprise Value, Free Cash Flow, and Return on Equity.
Marco Bozem
Investor & Analyst | Hard Assets, Dividends, Shipping | MB Capital Strategies
Marco analyses shipping, mining and energy stocks with focus on balance sheet strength, dividend sustainability and cycle positioning. All analysis based on public reports. Not investment advice.
Net Debt Net Debt/EBITDA Leverage Shipping Stocks Mining Stocks Dividend Safety
Related: Enterprise Value · Free Cash Flow · Dividend Safety · Dividend Coverage Ratio · Return on Equity