Net debt vs gross debt
Gross debt is the interest-bearing balance. Net debt subtracts surplus cash. On $40,000,000 of debt and $10,000,000 of cash, net debt is $30,000,000. Enterprise value is equity plus that net debt, $130,000,000 on $100,000,000 of equity.
| Net debt | Gross debt | |
|---|---|---|
| Formula | Debt minus surplus cash. | The debt line, unadjusted. |
| Teaching sheet | $40,000,000 of debt minus $10,000,000 of cash is $30,000,000. EV is $130,000,000 on $100,000,000 of equity. | $40,000,000. That is the full claim if cash is operating cash rather than a pile. |
| Cash zeroed out | Net debt equals gross debt at $40,000,000. EV rises to $140,000,000. EV/EBITDA rises from 13 to 14. | Still $40,000,000. Gross debt did not notice the cash line. |
| Higher EBITDA, same claims | Net debt is still $30,000,000 and EV is still $130,000,000. The multiple falls to 10 times on $13,000,000 of EBITDA. | Still $40,000,000. A flow does not move a stock of debt. |
| What subtracting cash claims | That the cash could be handed back tomorrow without changing the forecast. | Nothing. Gross debt does not make that claim. |
| When you would pick it | Building enterprise value as equity plus net debt. | When the cash line is working capital, or when a covenant is written on the gross balance. |
On this page
Cash is the whole gap
Net debt is gross debt minus surplus cash. On $40,000,000 of debt and $10,000,000 of cash, net debt is $30,000,000. Add that to $100,000,000 of equity and enterprise value is $130,000,000. Against $10,000,000 of EBITDA that is 13 times.
Zero the cash and net debt equals gross debt, $40,000,000. EV is $140,000,000. The multiple is 14 times. The $10,000,000 of cash had been worth exactly that much of EV.
How net debt works is . How enterprise value works is equity plus that net debt. How EV/EBITDA works is the multiple. Enterprise value is the stock identity.
Subtracting cash is a claim
The identity subtracts cash because the usual teaching sheet treats cash as surplus. Operating cash that has to sit in the business is not surplus. Subtracting it anyway understates enterprise value and understates net debt.
Gross debt does not make that claim. A covenant written on the gross balance does not shrink because a cash pile sat next to it.
This is educational material, not financial advice.
Worked examples
Net debt on the teaching sheet
Equity $100,000,000, debt $40,000,000, cash $10,000,000, EBITDA $10,000,000. Net debt, EV, multiple?
- Net debt is debt minus cash: $30,000,000.
- Enterprise value is equity plus net debt: $130,000,000.
- EV/EBITDA is 13 times on $10,000,000 of EBITDA.
Net debt is $30,000,000. Enterprise value is $130,000,000. EV/EBITDA is 13 times. Gross debt is the $40,000,000 input.
Cash zeroed, net equals gross
Same equity, debt and EBITDA. Cash $0.
- Cash is $0, so nothing is subtracted from the $40,000,000 of debt.
- Enterprise value is equity plus that full debt: $140,000,000.
- EV/EBITDA is 14 times.
Net debt equals gross debt at $40,000,000. Enterprise value is $140,000,000. EV/EBITDA is 14 times.
Same net debt, cheaper multiple
Back to $10,000,000 of cash, so net debt is still $30,000,000. EBITDA $13,000,000.
- Net debt is still $30,000,000, because the claims did not move.
- Enterprise value stays $130,000,000.
- EV/EBITDA is 10 times on $13,000,000 of EBITDA.
Net debt is still $30,000,000. Enterprise value is still $130,000,000. EV/EBITDA is 10 times on $13,000,000 of EBITDA.
Common questions
Is net debt always smaller than gross debt?
When cash is positive, yes, on this identity. If cash is zero, they match at $40,000,000 on the second sheet. If a firm had more cash than debt, net debt would be negative, which is a net cash position.
Which one goes into enterprise value?
Net debt, when cash is surplus: equity plus debt minus cash, which is equity plus net debt. If the cash cannot be taken out, do not subtract it, and live with gross debt in the bridge.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.