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Net debt.

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What is net debt?

Net debt is the company's interest-bearing obligations less the cash it could use to repay them. Conceptually it answers a simple question: if the business paid down every dollar of debt it could with the cash on hand today, how much debt would remain?

It matters because it is the hinge between two valuation lenses. Enterprise value belongs to all capital providers; equity value belongs to shareholders. Net debt is the difference between them, which is why it sits at the center of every purchase-price bridge.

It also anchors leverage. The ratio everyone quotes — net debt to EBITDA — uses net debt precisely because a company holding large cash balances is less levered, in substance, than its gross borrowings suggest.

How net debt is calculated

The build is short, but the line items are where deals are won and lost.

  1. Sum interest-bearing debt. Bank loans, bonds, drawn revolvers, capital and finance leases, and the current portion of long-term debt.
  2. Subtract cash and cash equivalents. Cash, money-market funds, and short-term marketable securities that can be liquidated quickly.
  3. Adjust for debt-like items. Buyers commonly add unfunded pensions, earnout liabilities, deferred consideration, and dividends declared but unpaid — anything that behaves like debt.
  4. Trim restricted or trapped cash. Cash that cannot legally or practically be swept to repay debt should not be netted, or it overstates the offset.

The headline formula stays simple: net debt = total debt − cash & equivalents, with the negotiation living in what counts on each side.

Net debt in a transaction

In most M&A deals the headline price is quoted on a cash-free, debt-free basis: the seller keeps the cash and clears the debt at close, and net debt at completion adjusts the equity proceeds dollar for dollar. A late draw on the revolver or a delayed payable can move the final wire.

Because of this, the definition of net debt is heavily negotiated in the purchase agreement. What the seller calls surplus cash, the buyer may call working-capital float — and that line determines who keeps it.

Frequently asked.

5 questions
01 What counts as debt in net debt?

All interest-bearing obligations: term loans, bonds, drawn revolving credit, finance and capital leases, and the current portion of long-term debt. In a deal context, buyers usually extend the definition to debt-like items such as unfunded pension liabilities, earnouts, and deferred purchase consideration.

02 Is all cash subtracted, or only some of it?

Only cash that is genuinely available to repay debt. Restricted cash, regulatory minimums, and cash trapped in foreign subsidiaries that cannot be repatriated cheaply are typically excluded, because they cannot actually be swept against borrowings.

03 Can net debt be negative?

Yes. A company holding more cash and equivalents than interest-bearing debt has a net cash position — negative net debt. In that case its enterprise value is lower than its equity value, and leverage ratios like net debt/EBITDA come in below zero.

04 How does net debt connect to enterprise value?

Net debt is the core component of the bridge from equity value to enterprise value: you add net debt (plus preferred and minority interests) to equity value to reach enterprise value. Solve the same equation the other way to back into equity value from an EV-based valuation.

05 Why does the net debt definition get fought over at close?

Because most deals are cash-free, debt-free, so net debt at completion adjusts the cash the seller actually receives. Every item classified as debt reduces the seller's proceeds, and every dollar of cash netted increases them, so both sides litigate the definition line by line in the purchase agreement.

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