Net debt: The definite list

Basel5's picture
Rank: Baboon | 120

Since this topic comes up on WSO every now and then, I thought that it might help to collect everything in one list. The underlying definition is all "interest bearing liabilities". I will split it up into "positive items" and "negative items" which are subtracted.
For some I don't have an exact reason why it is added. If you think that the explanation is not bullet-proof, please comment your rationale. I will update the list accordingly.

Positive items

Debt-like items

For debt, you must pay interest.

Where do I find it: Generally on the balance sheet, more detailed decomposition in the notes. Latest information in quarterly reports

Derivative liabilities (interest rate derivatives)

To value derivatives, you have to estimate the present value. This is done by discounting. This involves an interest rate. For some reason, only derivatives for trading activities are considered here. Derivatives for hedging activities are excluded for some reason.
Where do I find it: Notes

Capital leases

A capital lease is a financing agreement between two parties which is broken down into interest payments. This funding source of the leased asset. This does also apply to other capitalized expenses (e.g. rent). Under IFRS 16 (to be applied from 01/01/2019 on), less off-balance sheet financing (e.g. operating leases) is possible, thus, keep this in mind and make appropriate adjustments.

Where do I find it: Balance sheet, notes

Operating leases

Operating leases, as capital leases, are a funding source for the company. To arrive at the value to be added, the annual expense is multiplied by 8 (industry best practice). Moody's publishes a more detailed breakdown for different industries. Here, you see rather lower conversion numbers ("Moody's Proposes Update to Financial
Statement Adjustments: Treatment of Lease Obligations", March 2018).

Where do I find it: Notes

Minorities (Non-controlling interest)

Added because the company's consolidated income statement included this flow (i.e. revenues and costs) but EV does not, enabling an apples-to-apples comparison (e.g. EV/EBITDA).

Where do I find it: On the balance sheet under the equity account, notes

Preferred equity (preferred stock)

PS holders get a fixed dividend every year and have a higher claim on the company's assets than common equity investors. It is considered more debt-like than equity-like.

Where do I find it: On the balance sheet under the equity account, notes

Unfunded pension liabilities

Here, it is important to differentiate between to kinds of pension systems: The defined benefit plan (company saves money to pay it out later to employees) and defined contribution plan (company pays the pensions as they occur). For net debt, only the first type is of interest.
The company estimates the pension liabilities (i.e. how long will my employees live and how much do we need to pay them?) and discounts that amount (discounting means interest rate dependent!), called DBO. Then, in some jurisdictions, companies are obliged to create an assets pool (plan assets), these are recorded at fair value (FV). The difference is then called underfunded pension liabilities:

Unfunded status = FV(plan assets) - PV(DBO)

This can also be positive. From what I learned, this is then not subtracted from net debt (correct me when I'm wrong). Interview question: How does the low interest environment affect net debt?

Where do I find it: Some companies have the plan assets on the assets side and the DBO as liabilities some add it up and only report the difference on one side. Disclosure in the notes. The defined contribution plan needs to be disclosed in the notes too.

Health-care benefits

Here, the rationale and calculation is the same as for pension liabilities.

Where do I find it: Notes

Environmental provisions

When a company destroys the landscape by drilling holes into the ground they may be obliged to restore the original condition. The costs for that are estimated and then discounted.

Where do I find it: Provisions (notes)

Trapped cash

To go from debt to net debt, you must subtract cash. However, not all of this money is ready to be spent. There may be dividend blocks, national laws making the withdrawal difficult/ costly, or just the fact that the company requires a minimum cash level to operate (e.g. for working capital). Trapped cash can be calculated as:
Trapped cash = BV of cash - realizable value that the buyer can access

Where do I find it: Due diligence process


If the company needs significant investments into PPE (e.g. new machines). This amount of money may be included. The rationale is that this money could have earned the company some returns (?).

Where do I find it: Due diligence process

Deferred tax liabilities

This item occurs due to tax deferral strategies by the company (i.e. reduce the tax to be paid in the current period). This obligation may or may not materialize. An approach proposed by Damodaran is to estimate the point in time when the company's growth rate is "stable" and discount the tax liability from there. This could be the last in a DCF. He notes that this approach is rather conservative. I never heard of it before and just wanted to leave it here. ("What should you subtract out to get to equity value?", Damodaran, A.)

PV(DTL) = DTL/(1+r)^(T)

Where do I find it: Balance sheet, Notes

Other items

As discussed in the comments, the list cannot be "definite" since it largely depends on the company and transaction what is added.

Negative items

Associate companies

Enterprise value should only represent the core operations of the company. Associates are considered an investment in something else, like an investment in a stock. Thus, it is deducted from debt.


In short, your EV should be apples-to-apples with your Rev, EBITDA, EBIT, etc. When accounting for equity in earnings of affiliates, accounting rules require that companies show their proportional share of earnings or losses in affiliates after operating income. In other words, a company's share of earnings in affiliates is not included in the Revenue, EBITDA, or EBIT it reports, rather it shows up in net income. As such, the market value of those investments cannot be included in your EV either, otherwise, your multiples won't be apples-to-apples.

To be conservative, you should assume that shareholders in the company you are evaluating have priced in the value of the equity investments the company holds, and thus, the company's market cap is higher by the proportional amount of equity it holds in investments. To appropriately adjust market cap, and by extension, EV, back out the value of equity investments at fair market value. For investments in private companies, you can generally find FMV estimates in the footnotes of the 10k or 10q, and for public companies, you can find the number of shares held in the same footnotes, at which point, you can multiply those shares by the current market price of the affiliate investment to get to a current FMV.

Excess cash

Cash is subtracted because it reduces the net cost to a potential purchaser (used to issue dividends or to pay down debt).

Where do I find it: Balance sheet

Assets held for sale

Assets held for sale can be pretty much everything (e.g. a machine). The company has already decided to record it as a liquid asset, and this is also how it is treated in the net debt calculation.

Where do I find it: Balance sheet

Short-term investments

Short term investments which are recorded at equity are considered very liquid assets which can be converted into cash immediately. Therefore, they are treated as they were cash.

Where do I find it: Balance sheet (sometimes already included in cash and cash equivalents), Notes

Comments (14)

Mar 11, 2019

This is just a point of semantics, and others may have a different view (clearly you did), but in my opinion there's a difference between "goes into Enterprise Value" and "Net Debt".

Agreed for the most part on the content, although some items I think are "can go into Enterprise Value" and not "always go into Enterprise Value".

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Mar 11, 2019

There are a lot of items that can be reasonably considered as "Net Debt" or "Working Capital" depending on whether you're a buyer of the business or a seller... thus the purpose of Financial Due Diligence and Valuations teams.

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Mar 11, 2019

There is no definitive list. What's included in net debt is almost always negotiated in a deal.

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Mar 12, 2019

Nah, you're wrong. Sure, this happens a lot but conceptually, working cap is cash and debt free. Net debt obviously isn't.

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Mar 12, 2019

Have you never seen a purchase agreement? There can literally sometimes be a page long definition on what constitutes debt

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Mar 12, 2019

On my very first deal we managed to negotiate and get paid for DTAs related to depreciation - 'cash-like' item.

Not sure if that shit will swing at the big boys table though.

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Mar 12, 2019

Awesome post, thanks for this.

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Most Helpful
Mar 12, 2019

One item I'd add to the list of positives: capitalized lease/rent expense. Very common in debt ratings adjustments, especially in asset heavy industries (think planes, trains and automobiles). Granted this is more for "comps" purposes than for an PA in a deal obviously.

Illustrative Example: One airline rents all of it's planes and one owns (and debt finances). On an unadjusted basis, the airline that owns will appear to have higher debt.

And as always, remember, if you are doing comps (leverage as a multiple of EBITDA) make sure your numerator and denominator are apples to apples in terms of stakeholders.

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Mar 13, 2019

added. Thank you!

Mar 13, 2019

So we include capital lease obligations, right?

What about Operating leases (would we add the present value of future interest payments?)

Mar 13, 2019