Net debt
Valuation & CompsGross borrowings less cash, used as shorthand for the financing claim that sits between enterprise value and equity value.
Also written: net cash position
Net debt is gross borrowings, including overdrafts and drawn facilities, less cash and equivalents. It is the single most quoted number in the bridge and it is a shorthand, which is a different thing from being wrong.
Both halves carry an assumption. Adding borrowings at their balance sheet figure assumes book value is what it costs to clear them, which is fine for investment grade paper near par and unsafe for distressed debt. Subtracting cash assumes every euro of it is available to repay debt, which fails for restricted cash and is debatable for the float a business needs to operate.
The shorthand also silently omits everything else. Lease liabilities, pension deficits, non operating provisions and deferred acquisition payments are all claims a buyer inherits and none of them is inside the phrase net debt as most people use it. That is why market capitalisation plus net debt frequently lands well below a properly built enterprise value.
A negative net debt figure, meaning cash exceeds borrowings, is usually described as a net cash position. It reduces enterprise value below market capitalisation and is worth interrogating: cash that cannot be moved out of a subsidiary or is pledged as security is not the same as cash sitting in the group's main account.
Worked example
Borrowings of 450 and cash of 200 give net debt of 250, so a company with an equity value of 1,200 looks like an enterprise worth 1,450.
Add lease liabilities of 260, a pension deficit of 60 net of tax, non controlling interests of 90 and a remediation provision of 40, subtract equity method investments of 110, and treat 30 of the cash as restricted, and enterprise value is 1,820.
On 200 of EBITDA that is 9.10 times rather than 7.25 times. The shorthand was not slightly off, it was a different company.