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.
Net Debt · the mechanism
30 sec read
Build net debt the way a buyer builds it, and defend every line you added.
Where it comes up. A VP redlines your sources and uses and asks why the pension deficit is not in net debt. Every pound of that line comes off the equity cheque.
Start with the obvious
Total debt less cash and cash equivalents. Total debt means every borrowing, short and long term, drawn revolver included. An undrawn revolver is capacity rather than debt and does not belong here.
Add the debt-like items
A buyer adds anything that behaves like an obligation it will inherit: unfunded pension deficits, finance and operating lease liabilities under IFRS 16, deferred and contingent consideration, and any factoring or receivables financing. Each of these is a real claim, and each is argued over in a live deal.
Question the cash
Cash a business needs to operate is not available to the buyer, so a seller’s "cash" and a buyer’s "excess cash" are rarely the same number. Cash trapped in a jurisdiction that would be taxed on repatriation is worth less than its face value. Both are negotiated rather than read off a balance sheet.
Worked through
Reported: debt $600m, cash $150m. Diligence also finds a $80m pension deficit, $120m of lease liabilities, and $40m of operating cash the business cannot run without.
- Headline net debt
- $600m − $150m = $450m
- Plus pension deficit and leases
- +$200m
- Less non-available operating cash
- +$40m
- Net debt as a buyer would set it
- $690m
A $240m difference on an identical balance sheet, which comes straight off the equity cheque. This is why net debt is one of the most argued lines in a transaction and why it is never simply "debt minus cash".
Check yourselfA company has a $300m revolving facility with $50m drawn. What goes into net debt?
Answer once you have one →
$50m. Only drawn balances are debt, because only drawn balances are owed. The remaining $250m is available liquidity, which matters enormously to a credit analyst thinking about what the company could survive, and is not a liability. It is still disclosed, because capacity that can be drawn tomorrow changes the risk picture.
Be able to say this back next week
- Included only drawn debt, and excluded the undrawn revolver
- Added the debt-like items: pensions, leases, deferred consideration
- Questioned whether the cash on the balance sheet is actually available
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.
Practise it
Where two analysts who agree on EBITDA still end up far apart. Net debt, pensions, NCI, leases and the treasury stock method, each opening to its own inputs.
Open EV to Equity Bridge, free, 12 minWhere Net Debt comes up
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DCF interview questions guideRelated Valuation terms
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