How net debt is calculated

Net debt is interest-bearing debt minus surplus cash:

$$\text{net debt} = D - C$$

On $40,000,000 of debt and $10,000,000 of cash, net debt is $30,000,000. Add equity of $100,000,000 and you have enterprise value of $130,000,000, because $EV = E + \text{net debt}$. Against $10,000,000 of EBITDA that is 13 times.

A buyer of the whole firm pays the equity holders, takes on the debt, and inherits the cash. The cheque that prices the operations is the $130,000,000, not the $100,000,000. Net debt is the gap between those two prices.

The enterprise value calculator on this page prints net debt alongside EV. How enterprise value works owns the three-line identity. This page owns the subtraction in the middle. The enterprise value explorer holds equity and debt still and lets you drag cash: more surplus cash cuts net debt and cuts EV dollar for dollar.

Keep equity at $100,000,000, debt at $40,000,000 and EBITDA at $10,000,000. Set cash to $0. Net debt is the full $40,000,000. EV is $140,000,000. The multiple is 14 times.

The $10,000,000 of cash on the first sheet had been subtracted in full, so putting it back raises EV by exactly that amount. That is the teaching convention: surplus cash is not an operating asset. Cash a firm needs to run the operations is not surplus, and subtracting it would understate EV and understate net debt's cousin, the cash that cannot leave.

Type the cash your sheet is treating as surplus. Operating cash that has to sit in the business belongs in working capital, not in this subtraction.

Back to $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash, so net debt is still $30,000,000 and EV is still $130,000,000. Raise EBITDA to $13,000,000. The multiple is 10 times.

Net debt did not move. It is a stock identity. The flow in the denominator moved. A lower EV/EBITDA here is a more profitable year, not a less borrowed firm.

Enterprise value against equity value is the pair on one sheet: what this net debt does to the gap, and which multiple belongs on which number.

A full net-debt bridge often brings in leases, preferred stock, non-controlling interests and underfunded pensions. None of those are sliders here. Adding a lease liability raises net debt the same way adding a loan does, and it raises EV with it.

Net debt can be negative: surplus cash larger than interest-bearing debt. Then EV sits below equity value, because a buyer of the operations inherits a cash pile larger than the debt they take on. The identity does not break. The sign of $D - C$ flipped.

How leverage ratio works is book debt over book equity, a different object. Net debt here is a market-side bridge between two prices, not a book ratio.

Interest-bearing debt is loans, bonds and, in a full bridge, lease liabilities. Trade payables are not usually in this $D$, because they are already inside working capital and inside the cash flows a DCF is discounting. Count them here and in the cash flows and they are in twice.

Surplus cash is cash you could hand back tomorrow without changing the forecast. Restricted cash, compensating balances and cash that has to sit in the till are not surplus. The formula will subtract whatever you type. It will not know which pile you meant.

How DCF works produces enterprise value from unlevered cash flows. Subtract this net debt from that EV to get equity value. Mixing a DCF of the operations with equity value double-counts the $30,000,000, or ignores it, depending on which way you drifted.

It is not a full bridge, not a book leverage ratio, and not a recommendation about what multiple a firm should trade on. The three sheets are net debt of $30,000,000 inside EV of $130,000,000 at 13 times, net debt of $40,000,000 when cash is $0 (EV $140,000,000, 14 times), and the same $30,000,000 of net debt against $13,000,000 of EBITDA at 10 times. This is educational material, not financial advice.