Net Debt
Total debt less cash and cash equivalents, sometimes also less short-term financial assets. The version used for credit metrics often differs from the version used in the EV bridge, because credit analysts are stricter about which cash they will accept as genuinely available. Say which definition you are using.
Why Net Debt matters in interviews
Net debt is the bridge between enterprise value and equity value, and it is the denominator-adjacent figure in every leverage covenant. Interviewers ask about it to test whether you know which items count as debt-like — a question that becomes very real in live deal negotiations.
How it works in practice
Net debt = total debt (short-term plus long-term) − cash and cash equivalents. It answers: if the company used all its cash to repay borrowings, what would be left?
In practice, "debt-like items" extend well beyond bank borrowings: unfunded pension deficits, capitalised operating leases, deferred consideration from prior acquisitions, and factored receivables are all commonly negotiated into the net debt calculation on a deal.
Leverage is quoted as net debt / EBITDA. A company with $600m of debt, $100m of cash and $125m of EBITDA is levered at ($600m − $100m) / $125m = 4.0x.
What candidates get wrong
- Netting off all cash. Buyers argue that operating cash the business needs to function is not available for debt repayment and should be excluded.
- Ignoring debt-like items. In a sale process, the buyer's list of what counts as debt is a live negotiation that moves the equity price directly.
- Confusing net debt with net leverage. Net debt is a currency figure; net leverage is that figure divided by EBITDA.
Net Debt: frequently asked questions
What counts as a debt-like item?
Beyond bank and bond debt: unfunded pension obligations, capitalised leases, deferred or contingent consideration from earlier acquisitions, factored or securitised receivables, accrued but unpaid tax, and any off-balance-sheet financing. In an M&A process each of these is negotiated, because every pound classified as debt reduces the equity price pound for pound.
Why is net debt used instead of gross debt?
Because cash can be used to repay debt immediately, so the economically relevant figure is the borrowing that would remain. That said, lenders often set covenants on gross debt where they doubt the cash is genuinely available or is trapped in subsidiaries.
Go deeper
This term comes up constantly in valuation interviews and on the desk.
DCF interview questions guideRelated Valuation terms
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