Which formula describes the Net Debt to Equity Ratio?

The Net Debt to Equity Ratio is calculated to provide insight into a company's financial leverage and risk by comparing its net debt with equity. The correct formula is derived from understanding how net debt is defined.

Net debt takes into account the company’s total debt while subtracting liquid assets such as cash and current investments, which can be readily converted to cash. This is represented in the formula as total debt minus cash plus current investments, reflecting the company’s effective debt position after accounting for its available liquid resources.

Dividing this adjusted net debt figure by total equity provides a more accurate picture of financial leverage, as it illustrates how much debt exists in relation to shareholders’ equity after liquid resources are factored in. This approach helps investors understand the actual financial risk borne by equity holders, given that cash and current investments could potentially be used to reduce debt obligations.

Thus, option A accurately captures the relationship needed to assess financial stability and leverage in a comprehensive manner, making it the preferred choice for defining the Net Debt to Equity Ratio.