Net Debt and Working Capital
Definition
Net debt is the difference between a company’s interest-bearing debt and its excess cash. It is subtracted from enterprise value to arrive at equity value — the number that actually matters to the owner. If the company has 0 in excess cash, net debt is 1M in debt and 1M (meaning the balance sheet adds value).
Working capital is the cash required to fund day-to-day operations — the gap between when you pay your bills and when you collect from customers. It is measured as current assets minus current liabilities, but the number that matters is whether working capital is sufficient and efficient. Days sales outstanding (DSO), days payable outstanding (DPO), and inventory turnover are the levers.
Together, net debt and working capital are two of the four KPIs that drive market value — alongside Normalized EBITDA and the multiple.
Why This Matters for Owners
Enterprise value gets all the attention, but equity value is what the owner actually takes home. Net debt is the bridge between the two. An owner who grows EBITDA but loads up on debt hasn’t created equity value — they’ve created enterprise value for the lender.
Working capital efficiency is one of the biggest hidden drivers of value. If your DSO is 60 days when it could be 45, that’s real cash trapped in the business that could be funding growth, distributions, or debt paydown. Improving working capital efficiency converts directly into free cash flow and balance sheet strength.
How They Connect
A company with low net debt and efficient working capital has a stronger balance sheet, which means: more cash available for distributions, less risk for buyers (which improves deal terms), and more capacity to fund growth without dilution. In the case studies, Advanced Solutions had 0 debt, 3M swing in equity value from the balance sheet alone.
Where This Concept Appears
- Lesson 37 — Full teaching lesson on net debt and working capital as the third and fourth KPIs
- Lesson 38 — Case study comparison showing balance sheet impact on equity value
- Lesson 45 — Advanced Solutions transformation shows net debt going from 2M
- Module 4 (Sustainable Financials) — Integrated into the three-statement model and balance sheet tracking