Net Debt in Interviews: The EV to Equity Bridge Without Missing Items

"Walk me from enterprise value to equity value" is a staple. Students often say "EV minus net debt" and freeze when the interviewer adds leases, preferred stock, or minority interest. This guide is the full bridge with the judgment calls interviewers care about.

The core bridge

Equity Value = Enterprise Value
− Net Debt
− Preferred Equity
− Noncontrolling Interest (NCI)

other adjustments as relevant

And the classic definition:

Net Debt = Total Interest-Bearing Debt − Cash & Cash Equivalents

Simple is fine for a first sentence. Then show you know the messy items.

What usually sits in "debt"

Cash: all cash or excess cash?

Interview default: subtract cash and cash equivalents.

Nuance they may want:

• Minimum cash stays in the business for ops; only excess cash reduces net debt in a take-private style view
• Restricted cash may not be available to equity
• In LBOs, sources and uses often set a minimum cash at close

If unsure, state: "In a trading comps EV I subtract reported cash; in an LBO I would ring-fence minimum cash."

Cash-free debt-free deals make the bridge contractual: you often deliver a locked cash and debt figure at close, so interview "net debt" and SPA "net debt" can differ. Say which world you are in before you invent precision.

Worked bridge

Assume:

Enterprise value (offer)     1,000
Cash                           80
Revolver + term loans         350
Finance leases                 40
Preferred stock                50
NCI                            20

Interview math:

Net debt ≈ (350 + 40) − 80 = 310
Equity value to common ≈ 1,000 − 310 − 50 − 20 = 620

Why NCI and preferred are not "net debt"

Net debt is about interest-bearing claims that sit between EV and equity in a capital structure sense, but preferred and NCI are equity-like claims on value that do not belong to the parent's common shareholders. Shoving them into "debt" muddies cost of capital conversations. Keep them as separate bridge lines unless the firm’s template says otherwise.

Leases: the follow-up that separates candidates

Under modern lease accounting, many lease obligations are on balance sheet. For EV / EBITDA comps, teams often:

• Use enterprise value that is consistent with how EBITDA is defined (lease-adjusted or not)
• Or present both "lease-in" and "lease-out" views

In an interview: "I match the lease treatment on EV and on the earnings metric so the multiple is apples to apples."

LBO angle

At entry, equity value paid for the company depends on cash-free debt-free vs locked-box style terms. At exit, equity proceeds = exit EV − net debt (and other claims). Missing a mezz tranche or seller note in the exit net debt overstates MoIC. Same for earn-outs and contingent consideration when the firm treats them as debt-like claims in the bridge.

Verbal 30-second version

"Enterprise value is the value of core operations to all capital. I get to equity value by subtracting net debt, which is interest-bearing debt minus cash, then subtracting other claims like preferred and NCI. I call out leases and minimum cash when the situation needs it, and I keep EV and EBITDA definitions consistent for multiples."

Practice prompts

1. Company has $100 cash, $20 restricted cash, $400 debt, $30 operating lease liability. What is net debt for a simple EV bridge?
2. Does deferred tax liability go in the bridge? (Usually not as debt; discuss separately.)
3. How does net debt change the day after a dividend recap?
4. Walk EV to equity with leases on balance sheet and explain how you keep the EBITDA definition consistent.

Related

See Enterprise Value vs Equity Value and Cash vs Stock M&A for how the bridge shows up in deal structures. For purchase-price mechanics, pair with cash-free debt-free.