Net Debt

What Is Net Debt?

Net debt (deuda neta) is one of the most important financial metrics in corporate finance, investment analysis, and M&A. It represents the amount of debt that remains after netting off the company’s available cash:

Net Debt = Total Financial Debt – Cash and Cash Equivalents

If net debt is positive, the company owes more in debt than it holds in cash — it is a net borrower. If net debt is negative (i.e., cash exceeds debt), the company is a net cash company.

What Is Included in Financial Debt?

Financial debt (deuda financiera) includes all interest-bearing obligations of the company:

• Bank loans and credit facilities (préstamos bancarios, pólizas de crédito)
• Bonds and notes (obligaciones y bonos)
• Finance leases (arrendamientos financieros) — including operating leases capitalised under IFRS 16 or equivalent
• Shareholder loans (préstamos de socios)
• Intercompany borrowings from group companies
• Deferred consideration from acquisitions (to the extent interest-bearing)
• Factoring with recourse (where the company retains the credit risk)

Trade payables (amounts owed to suppliers) are not financial debt — they are working capital items. This distinction is fundamental and a frequent source of confusion.

The Enterprise Value to Equity Value Bridge

In M&A, the relationship between Enterprise Value (EV) and Equity Value (the price paid for the shares) is:

Equity Value = Enterprise Value – Net Debt – Debt-Like Items + Cash-Like Items

Enterprise Value (EV)

EV represents the value of the whole business independent of its financing structure — the price a buyer would pay to acquire all the assets, free of financial obligations. It is typically derived from an EBITDA multiple or a DCF analysis.

Equity Value

Equity Value represents the value of the shareholders’ interest — the residual after all financial obligations are repaid. This is the price paid in a share acquisition.

Debt-Like Items (Conceptos Asimilados a Deuda)

Beyond formal bank debt, buyers routinely identify additional items that behave economically like debt and deduct them from EV to reach equity value:

• Pension and retirement obligations (compromisos por pensiones o prejubilaciones)
• Deferred tax liabilities (particularly in PE transactions)
• Contingent liabilities identified in due diligence (pending tax claims, litigation, Social Security shortfalls)
• Capex commitments (inversiones comprometidas): amounts the company has contractually committed to spend
• Off-balance-sheet liabilities (earn-outs on prior acquisitions, guarantee obligations)
• Current income tax payable

The definition of debt-like items is one of the most heavily negotiated aspects of an SPA in Spain.

Cash-Like Items (Conceptos Asimilados a Caja)

Similarly, buyers add back items that are economically equivalent to cash:

• Receivables from related parties (shareholder loans owed to the company)
• Tax refunds receivable (confirmed by the AEAT)
• Deposits and escrow accounts

Net Debt in Spanish Financial Statements

Spanish annual accounts (cuentas anuales) under Plan General Contable present financial debt in the balance sheet:

Non-current financial liabilities (pasivos financieros no corrientes): Long-term debt (maturity > 12 months)

• Bank borrowings
• Finance leases (long-term portion)
• Other long-term financial liabilities

Current financial liabilities (pasivos financieros corrientes): Short-term debt (maturity ≤ 12 months)

• Current portion of long-term loans
• Short-term bank borrowings and overdrafts
• Current portion of finance leases

Cash and equivalents (efectivo y equivalentes de efectivo): Cash at bank and in hand, plus short-term deposits with original maturity of three months or less.

Net debt = sum of all financial liabilities (current and non-current) minus cash and equivalents.

Net Debt/EBITDA — The Leverage Ratio

The ratio of net debt to EBITDA is the standard leverage metric used by banks, investors, and rating agencies:

Leverage = Net Debt / EBITDA

This ratio answers: “How many years of operating cash flow are needed to repay the company’s net debt?”

• Below 1.0x: Conservatively leveraged
• 1.0x – 2.5x: Normal operating leverage
• 2.5x – 4.0x: Elevated but serviceable for stable businesses
• Above 4.0x: High leverage, appropriate only for specific situations (PE buyouts, infrastructure, real estate)

Net Debt Adjustments in Spanish M&A

A significant source of complexity and dispute in Spanish M&A is the precise calculation of net debt at closing. Issues include:

Timing of cash flows: Cash that arrives or leaves the company in the days before closing can significantly affect the net debt calculation. Sellers may accelerate collections and delay payments.

Treatment of overdrafts: Spanish companies often use revolving credit facilities (pólizas de crédito) that may be in debit (overdraft) at some times and in credit at others. Is the drawn balance included in debt? (Generally yes.)

Lease liabilities: With the adoption of IFRS 16 equivalents, operating lease liabilities are now balance sheet items. Buyers and sellers must agree whether these are included in net debt.

Restricted cash: Cash that cannot be freely used (pledged accounts, regulatory reserves) should not be netted against debt. Identifying restricted cash requires careful due diligence.

Net Debt in Financial Covenants

Spanish bank loan agreements typically include financial covenants based on net debt:

• Leverage covenant: Net debt/EBITDA must not exceed a specified threshold (e.g., 3.5x)
• Gearing covenant: Net debt/Equity must not exceed a specified ratio

Breach of a covenant gives the bank rights to accelerate the loan, renegotiate terms, or demand additional security. Covenant compliance is monitored quarterly through the company’s management accounts.

Frequently Asked Questions

Is cash at a subsidiary included in the group’s net debt calculation? At the consolidated level, yes — cash at all subsidiaries is included (unless restricted). At the standalone entity level, only the parent’s own cash is included. In M&A, the relevant net debt is usually the consolidated position of the target group.

How are shareholder loans treated in net debt? Shareholder loans are typically included in net debt from the buyer’s perspective — the buyer either repays them at closing or agrees to leave them in place, but they represent an obligation of the company. If the seller agrees to leave a shareholder loan in place, it may be treated as quasi-equity (rolled over into the new structure), but this must be explicitly agreed in the SPA.

What is “normalised” net debt? In an M&A context, normalised net debt adjusts the closing balance sheet net debt for items that are expected to recur (seasonal fluctuations in the revolving credit line, accrued interest not yet settled) to provide a cleaner picture of the permanent debt burden of the business.

How does net debt affect the DCF valuation? In a DCF, the enterprise value (EV) is calculated by discounting projected free cash flows. Equity value = EV minus net debt (as of the valuation date). A higher net debt means a lower equity value for the same EV. In LBO modelling, the net debt schedule — showing how debt is repaid from cash flows over the holding period — is central to the return calculation.

What happens to net debt in a sale of a subsidiary? When a subsidiary is sold, its cash (which was included in the group’s net cash) is transferred to the buyer; any debt associated with the subsidiary is transferred or repaid at closing. The remaining group’s net debt adjusts accordingly.

How BMC Can Help

We calculate, define, and negotiate net debt in Spanish M&A transactions, advise on the treatment of debt-like items in acquisition pricing, and model leverage scenarios for financing and restructuring mandates.